Should you subscribe to the SKYCITY Entertainment Group Limited-Ord capital raising?

Earlier this month, casino and hotel operator SKYCITY Entertainment Group Limited-Ord (ASX: SKC) halted trading to announce it will raise capital to help fund its major upcoming growth projects.

It’s a well-trodden path. FlexiGroup Limited (ASX: FXL) elected to raise capital last year for its acquisition of Fisher & Paykel Finance, while several of the banks, including Australia and New Zealand Banking Group (ASX: ANZ), have asked shareholders to pony-up to raise equity and boost balance sheets.

But what impact do the additional shares have on the company, its share price and you as a shareholder?

What it means for you

In SkyCity’s case the company is trying to raise NZ$263 million from eligible shareholders in a 1-for-10 rights issue. If you are a current shareholder you will need to take-up the full offer to prevent having your ownership stake in the company diluted, but the discounted price being offered makes it more attractive.

The offer looks well timed for current shareholders at the height of the company’s recent share price level. This means the company needs to issue fewer shares to gain the capital it requires, which reduces the dilution impact to shareholders.

By the time the process is complete, the offer will add 10% to the number of SkyCity shares outstanding.

Wait… so will the share price fall 10%?

Unlikely. In return for issuing 10% more shares, SkyCity is gaining a big pile of cash (NZ$263 million). The cash will be added to the balance sheet, increasing the company’s value and offsetting the increase in outstanding shares.

But what about earnings per share?

The projects SkyCity will use the funds for are still being built, so there will not be an instant earnings-accretive increase in the company’s earnings from raising the money. In the short term this means company earnings will be divided over a greater number of shares, potentially reducing earnings per share (eps) and therefore increasing the price-to-earnings (p/e) ratio many investors look at as a proxy for value.

Fortunately, SkyCity’s outlook is for a year of solid growth, with  year-to-date EBITDA (Eanrings Before Interest, Tax, Depreciation and Amortization), tracking up 8.6%. If this transitions through to full-year earnings per share the company’s p/e ratio should be only slightly below its level pre-capital raising.

Should you buy?

As a SkyCity investor I’m electing to take up the offer. The growth projects in my view will have a positive long-term contribution to company earnings once complete and strengthen the ‘entertainment hub‘ strategy the company has successfully adopted.

However before you commit – be sure the increased holding will be right for you and your portfolio, especially relative to your many other investment options.

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Motley Fool contributor Regan Pearson owns shares of FlexiGroup Limited and Sky City Entertainment Group Ltd.. 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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