Here’s why the SKYCITY Entertainment Group Limited share price is plunging today

Casino operator SKYCITY Entertainment Group Limited-Ord (ASX: SKC) released its quarterly results to the market this morning. Group earnings fell heavily as a result of poor economic conditions and lower gambling activity across the company’s premises. Here’s what you need to know:

  • Normalised revenue (adjusted for theoretical win rate) fell 5.7% to $262 million
  • Revenues fell 0.3% in New Zealand, 8.2% in Australia, and 20.2% in the important International Business (VIP) gambling business
  • International Business revenues expected to remain weak in the near term
  • Margins shrank slightly due to the decreased revenue
  • Business developments including Cantonese restaurant and Hobson St projects continue to schedule
  • No other changes to budget or capital expenditure, costs remain ‘broadly in-line with expectations and previous market guidance

Today’s quarterly report is one of the best I’ve seen in terms of frankness and transparency to shareholders. Management also reported that, in light of the recent arrests of Crown Resorts Ltd (ASX: CWN) employees in China, Skycity does not have any Chinese offices or employees in China, although it does at times use ‘independent contractors’ in China to help manage customer relationships. It is confident they comply with all relevant Chinese laws and regulations.

Management reported that although the eventual outcome of the Chinese crackdown on corruption was largely uncertain, in the near to medium term it was expected to have an adverse effect on operations.

How much will it hurt?

The impact on Skycity could potentially be severe, with management reiterating that 65% of total group turnover was from direct relationships with VIP customers, and 50% of total group turnover was from Chinese customers. However, International Business (‘IB’) customers represent 15% of normalised group revenue and 10% of normalised Earnings Before Interest, Tax, Depreciation and Amortisation (EBITDA).

Extrapolating the most recent quarter’s 20% decline in IB revenues to the full year, this means Skycity’s group revenues could fall 3% (excluding growth from other sources). The decline in IB activity is, as management noted, likely to get worse after the arrests which did not happen in the quarter that was reported on today.

While a negative outcome is never good, Skycity has a good portfolio of assets and I would see significant falls in the next few weeks as an opportunity. I also take my hat off to management for their frankness to shareholders today, and I would be far more inclined to stick with an honest management team in tough times than I would one that tries to ‘spin’ announcements like these.

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Motley Fool contributor Sean O'Neill has no position in any stocks mentioned. 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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