This morning Auckland-based casino operator SKYCITY Entertainment Limited (ASX: SKC) told investors it now expects normalised profits to be up around 11% to NZ$97 million for the half-year period ending December 31, 2018. It also expects normalised EBITDA (operating income) to be up around 10% to NZ$189 million.
The caveat is that the normalised numbers reflect a bad first half for the casino's high roller international punters who scored an actual win rate of 0.98% over the period, compared to the theoretical win rate of 1.35%.
The run of bad luck for the punters is good news for shareholders though with the group now flagging that it expects to beat prior full year guidance for "modest" growth in EBITDA.
While part of the company's performance comes down to luck on the playing tables the majority of it is linked to the ability of its flagship Auckland SkyCity entertainment centre and casino to bring in tourists and locals.
I've flagged many times over the years how I like the outlook for this business based on the dominant and monopoly-like status of its Auckland asset and the leverage it has to a rising tide of tourism from Asian visitors in particular.
In that sense SkyCity has similar competitive advantages to Crown Resorts Limited (ASX: CWN) thanks to its dominant Crown casino in Melbourne that has no real competition.
SkyCity's redevelopment plans for its Auckland site have been hit by delays, while it's also redeveloping its Adelaide casino site for a total investment of $330 million.
It also has plans to redevelop its Hamilton and Queenstown casinos, while it sold its Darwin site for $188 million earlier in 2018.
Valuation
The company paid an FX-adjusted 18.5 cents per share in dividends in FY 2018 which gives it an unfranked trailing yield of 5.3%, with FX-adjusted earnings per share of 23 cents to place it on 15x trailing earnings.
Given the forecast for double-digit growth in FY 2019 we can see that the stock looks reasonable value given the monopoly-like status of its core Auckland asset that looks positioned to deliver some steady if unspectacular growth over the long term.
The key risk to the business other than a general macro-economic driven downturn in tourism is the net debt level of 1.3x EBITDA at NZ$447 million as the group continues to borrow to fund its construction and expansion strategies.
It's also paying a relatively high 6.21% average interest rate on the debt that reflects its BBB- credit rating at the bottom of S&P's investment grade rankings.
As such it's a business to keep a close eye on as it's walking a fine line, but for dividend seekers I think it could offer decent total returns from here.
