Why the SKYCITY Entertainment Group Limited-Ord share price hit a record high today

Shares in casino operator SKYCITY Entertainment Group Limited-Ord (ASX: SKC) hit a record high of $4.47 this morning after the company reported a strong start to 2016 thanks to fast-growing international visitor numbers.

For the six-month period ending December 31 2015 the group posted normalised EBITDA of NZ$178.2 million on normalised revenues of NZ$562 million. The earnings and revenue are up an impressive 15.4% and 10.2% over the prior corresponding period (pcp).

The group’s core asset the SkyCity casino and entertainment complex in downtown Auckland delivered EBITDA of NZ$135.4 million, up 8.9% over the pcp and the group is investing $24 million to upgrade its Auckland property that is benefiting from some strong tailwinds. These include record tourism numbers, strong immigration, rocketing Auckland house prices and falling interest rates that are all contributing to the improved outlook for SkyCity, Auckland.

The group is also committing $700 million to building the New Zealand International Conference Centre (NZICC), which will include a city centre 300-room 5-star hotel and large car park. The plan being to sell the hotel in order to fund further development elsewhere.

SkyCity also has casinos in Hamilton and Queenstown in New Zealand, with the Queenstown operation in particular benefiting from the continued growth of international tourism. In Australia it owns casinos in Darwin and Adelaide, with major investment totaling $300 million still planned for an Adelaide business that has failed to fire in recent times. Although business from tourists at the Adelaide casino remains robust, South Australian residents are not visiting the casino in the numbers the group hoped for.

However, the Auckland business remains the key earnings driver and it possesses a wide moat as the sole casino and large entertainment complex within the city, in a similar way that Crown Resorts Limited (ASX: CWN) possesses the dominant casino complex in Melbourne.

SkyCity now trades on around 20x annualised earnings per share of NZ 24 cents, with the NZX-listed scrip at a record high of NZ$4.99. The group also offers an attractive yield in the region of 4.5%.

Debt remains a key metric to watch with the group borrowing heavily to fund its Adelaide and Auckland development projects.

It has around $NZ 700 million in bank debt, fixed rate bonds, and private debt funded by US investors. At less than 3.5x 2015’s full year EBIT this looks manageable and the group has NZ$350 million of committed undrawn bank facilities. Operating cash flows are strong, with cash in hand of NZ$68.3 million at the period end, up from NZ$53.2 million at the start of the previous period.

The key driver for the outlook is that Chinese and Asian tourists are visiting New Zealand in fast-growing numbers, with Chinese visitors now only behind Australians in monthly numbers.

In January 2016 Auckland International Airport Ltd (ASX: AIA) reported Chinese visitors were up 47% over the prior corresponding month and this is a growth trend unlikely to reverse anytime in the future. Even a small lift in international visitor numbers can have a big impact on SkyCity’s bottom line and I remain bullish on the stock’s outlook.

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Motley Fool contributor Tom Richardson has no position in any stocks mentioned.

You can find Tom on Twitter @tommyr345

Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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