SKC - Sky City

[Snoopy]

Interesting stuff Snoopy.

One question what was debt like in 2000 compared to now.

NPX is another co like this .......heaps of new capital etc to buy things to make them bigger and stuff all in the way of extra profit .......makes you wonder eh

Good question Winner.

30th June 2012 Declared Balance Sheet is as follows:

Total assets $1716.2m
Total Liabilities $907.1m

Net Assets $809.1m


30th June 2000 Balance Sheet Position as follows

Total assets $798.5m
Total Liabilities $571.7m

Net Assets $226.8m

Any comments?

SNOOPY

[Snoopy]

30th June 2012 Declared Balance Sheet is as follows:

Total assets $1716.2m
Total Liabilities $907.1m

Net Assets $809.1m


30th June 2000 Balance Sheet Position as follows

Total assets $798.5m
Total Liabilities $571.7m

Net Assets $226.8m

We can calculate from this the relative performance of the Auckland casino site in FY2012 verses FY2000.

The segment result for FY2012 lists the Auckland site assets as worth $720.271m out of $1716.266m of total assets, or 41.97% of total assets.

The apportioned amount of net assets is therefore:

0.4197 x $809.1m = $339.6m

I calculate the net profit of the Auckland site was $92.7m after tax in FY2012.

So we can now calculate the return on equity of the Auckland site as follows:

$92.7m/$339.6m= 27.3%

Back in FY2000 the declared profit was $60.276m. The ROE calculation for year 2000 is therfore:

$60.3m/$226.8m= 26.6%

Therefore looking at the Auckland site alone SKC has actually done very well, growing the business and the return on shareholders equity. If they do the same again with the prospective NZ convention centre expansion, it could be very good news for shareholders.

SNOOPY

[Snoopy]

Therefore looking at the Auckland site alone SKC has actually done very well, growing the business and the return on shareholders equity. If they do the same again with the prospective NZ convention centre expansion, it could be very good news for shareholders.

The 'problem' with SKC is the return from those non-Auckland assets.

The segment result for FY2012 lists the Auckland site assets as worth $720.271m out of $1716.266m of total assets. That means $995.995m of assets are those outside of Auckland. That is 58.03% of assets.

The apportioned amount of net assets is therefore
0.5803 x $809.1m= $469.5m

Net profit attributable to other assets I estimate at $38.6m
ROE = $38.6m/ $469.5m= 8.22%

This is really barely a point or so above the cost of capital. I don't believe we should assume that any investment outside of Auckland would return more than an 8% yield, when valuing SKC from a potential investment perspective.

SNOOPY

[modandm]

Sold my SKC late last week. Just wanted to dip in to mention it.

Don't see it as a bad investment just see better opportunities elsewhere. SKC in my mind is relatively reliable slow growth and it has delivered that for me over the last 3 odd years of ownership returning about 16% + dividends = about 12% pa. This is about in line with the market in general. You are paying a decently high multiple for that relative quality. I do think there is a risk re the convention centre and that it will likely take some time for it to get approved, and earn a decent return on capital. With all the money SKC has spent on it now it seems unlikely they will pull out.

Would consider buying back at lower levels but like I say I beleive I can find sexier, higher growth, higher gain opportunities elsewhere at this point. I see no reason why it shouldn't continue to deliver tidy 10-12% returns over the next 5 years. I certainly still prefer SKC over AIA by some margin.

Good luck to all holders.

[Snoopy]

Sold my SKC late last week. Just wanted to dip in to mention it.

Don't see it as a bad investment just see better opportunities elsewhere. SKC in my mind is relatively reliable slow growth and it has delivered that for me over the last 3 odd years of ownership returning about 16% + dividends = about 12% pa. This is about in line with the market in general. You are paying a decently high multiple for that relative quality. I do think there is a risk re the convention centre and that it will likely take some time for it to get approved, and earn a decent return on capital. With all the money SKC has spent on it now it seems unlikely they will pull out.

Would consider buying back at lower levels but like I say I believe I can find sexier, higher growth, higher gain opportunities elsewhere at this point. I see no reason why it shouldn't continue to deliver tidy 10-12% returns over the next 5 years. I certainly still prefer SKC over AIA by some margin.

Good luck to all holders.

Modandm it looks like your time as an SKC shareholder has been well rewarded. Well done.

I probably have a slightly more negative outlook for the market in general than you do. Personally I think your 10-12% returns for SKC over the next five years will prove optimistic, and I don't see 'the market' getting anywhere near that figure. I see the reason for the premium multiple that SKC trades at to be the relatively small downside risk if the rest of the market goes bad. The way I see it even at a 7% gross annual return (dividends and share price appreciation) as an SKC shareholder I will outperform the market by a couple of return points per year.

Good luck in your search for something sexier. But if you find an alternative opportunity that is mind numbingly boring on the way please let us know.

SNOOPY

[Snoopy]

The 'problem' with SKC is the return from those non-Auckland assets.

The segment result for FY2012 lists the Auckland site assets as worth $720.271m out of $1716.266m of total assets. That means $995.995m of assets are those outside of Auckland. That is 58.03% of assets.

The apportioned amount of net assets is therefore
0.5803 x $809.1m= $469.5m

Net profit attributable to other assets I estimate at $38.6m
ROE = $38.6m/ $469.5m= 8.22%

This is really barely a point or so above the cost of capital. I don't believe we should assume that any investment outside of Auckland would return more than an 8% yield, when valuing SKC from a potential investment perspective.

OK time to put a stake in the turf and pick a valuation for this.

I use the 'Mary Buffett' model of compounding reinvested retained earnings to value my shares. That involves an assessment of ROE which based on the Auckland assets alone is 27%. The problem is the ROE on the other assets is much less, around 8%, so what to do?

As a conservative assumption I have assumed the Auckland based New Zealand Convention Centre will not be built by SKC, but the existing Auckland assets will retain their cash generating ability demonstrated in rugby world cup year. The non Auckland assets I have assumed will earn 8% on apportioned equity.

Putting those figures into my model and using a ten year time projection and using a buy price of $3.80, I believe the annual return on SKC shares will average around 5.12% net or 7.4% gross. This assumes steady dividends reinvested in those overseas properties and a share price in ten years time in the mid four dollar region.

I guess that outlook will sound fairly boring to some. But I favour boring investments, the more boring the better.

SNOOPY

[Snoopy]

As a conservative assumption I have assumed the Auckland based New Zealand Convention Centre will not be built by SKC, but the existing Auckland assets will retain their cash generating ability demonstrated in rugby world cup year. The non Auckland assets I have assumed will earn 8% on apportioned equity.

Putting those figures into my model and using a ten year time projection and using a buy price of $3.80, I believe the annual return on SKC shares will average around 5.12% net or 7.4% gross. This assumes steady dividends reinvested in those overseas properties and a share price in ten years time in the mid four dollar region.

Ok I am now going to 'do an economist' and hedge my bets.

Let us now assume that SKC does get the $350m nod to build the new national conference centre based in Auckland. How do I model that?

Well $350m divided by 577m shares equates to 60.7cps. That includes debt and equity of course. So I have assumed SKC will make an equity contribution to the new convention centre of 30cps.

I have reworked my Mary Buffett model to build the Auckland equity up by 30cps (that will take about 5 years by my reckoning) with the ROE rate of 8% applying to all the excess earnings from the Auckland property after that.

Again based on a buy in price of $3.80, I am projecting an annual return for the next ten years of 6.54% net (9.34% gross). The model assumes a share price in the middle $5 range in ten years time.

By this measure I think a $3.80 share price starts to look moderately cheap. Of course there is some execution risk built into this alternative view. But SKC have proved that past development of the Auckland site along these lines can be done. And I have given them ten years to get it right!

SNOOPY

[Snoopy]

Let us now assume that SKC does get the $350m nod to build the new national conference centre based in Auckland. How do I model that?

Well $350m divided by 577m shares equates to 60.7cps. That includes debt and equity of course. So I have assumed SKC will make an equity contribution to the new convention centre of 30cps.

I have reworked my Mary Buffett model to build the Auckland equity up by 30cps (that will take about 5 years by my reckoning) with the ROE rate of 8% applying to all the excess earnings from the Auckland property after that.

Again based on a buy in price of $3.80, I am projecting an annual return for the next ten years of 6.54% net (9.34% gross). The model assumes a share price in the middle $5 range in ten years time.

By this measure I think a $3.80 share price starts to look moderately cheap. Of course there is some execution risk built into this alternative view. But SKC have proved that past development of the Auckland site along these lines can be done. And I have given them ten years to get it right!

Have had another good look at my SKC spreadsheet, and in particular the growth levels inside and outside of the Auckland home site. based on post financial crisis performance, I have revised my projected return on equity figure of the Auckland site down to 25% (down from 27.3%). The Auckland site has done well, but as a counterpoint to that, management have spent an awful lot of money to make it perform!

I have also raised my 'out of Auckland ROE' from 8.2% to 8.6%. This reflects the significantly improved returns from Darwin and Hamilton in particular. These two changes have meant very little to my ongoing earnings projections though.

I calculate the annual 'convention centre approved return' to be 9.53% (gross, dividends and capital gain), up from 9.34%, based on an SKC share price of $3.80. The 'convention centre somewhere else' return goes up to 7.6% (gross, dividends and capital gain), up from 7.4%.

Perhaps worryingly, given how long these convention centre negotiations are going on, I believe the difference in share price today between 'Convention Centre Yay' and 'Convention Centre Nay' is about 80c per share.

Put another way, if the convention centre is approved, the SKC share price I think would break the $4 barrier. If turned down then I believe something like $3.20 would be closer to fair value.

Usually a share price drop from $3.80 to $3.20 on a quality share like SKC would attract my interest. In this case though I believe such a share price fall in the 'Convention Centre Nay' scenario would probably be justified. Such is the dependence of SKC on the ongoing development of that Auckland site.

On another thread someone suggested that because SKC had lagged the market a bit this year, it might be a good buy. I would say it is currently fairly priced, with a significant downside risk should convention centre negotiations go less than favourably. Be careful out there fellow investors.

SNOOPY

discl: hold SKC

[modandm]

Have had another good look at my SKC spreadsheet, and in particular the growth levels inside and outside of the Auckland home site. based on post financial crisis performance, I have revised my projected return on equity figure of the Auckland site down to 25% (down from 27.3%). The Auckland site has done well, but as a counterpoint to that, management have spent an awful lot of money to make it perform!

I have also raised my 'out of Auckland ROE' from 8.2% to 8.6%. This reflects the significantly improved returns from Darwin and Hamilton in particular. These two changes have meant very little to my ongoing earnings projections though.

I calculate the annual 'convention centre approved return' to be 9.53% (gross, dividends and capital gain), up from 9.34%, based on an SKC share price of $3.80. The 'convention centre somewhere else' return goes up to 7.6% (gross, dividends and capital gain), up from 7.4%.

Perhaps worryingly, given how long these convention centre negotiations are going on, I believe the difference in share price today between 'Convention Centre Yay' and 'Convention Centre Nay' is about 80c per share.

Put another way, if the convention centre is approved, the SKC share price I think would break the $4 barrier. If turned down then I believe something like $3.20 would be closer to fair value.

Usually a share price drop from $3.80 to $3.20 on a quality share like SKC would attract my interest. In this case though I believe such a share price fall in the 'Convention Centre Nay' scenario would probably be justified. Such is the dependence of SKC on the ongoing development of that Auckland site.

On another thread someone suggested that because SKC had lagged the market a bit this year, it might be a good buy. I would say it is currently fairly priced, with a significant downside risk should convention centre negotiations go less than favourably. Be careful out there fellow investors.

SNOOPY

discl: hold SKC

I think your view of the convention centre is a bit off Snoopy (no offence). The way I see things the business is fairly valued as is without the convention centre. Even if the convention centre goes ahead it is unlikely that the ROI will be much above cost of capital and also the payout period is quite some time away and risky, therefore I imagine the market will not rerate the stock higher in the short term. Part of the reason SKC want the convention centre is to extend a licence and further cement their position as a key part of the city. If anything I see it as a defensive investment to protect the company long term.

On the other hand should they not get the convention centre (which I see as highly unlikely), uncertainty and risk will be removed and the company will be looking at increased dividends or perhaps a share buy back once imputation credits are all used up. Overall this could be a significant positive for the stock.

I am still out - but will return one day.

best regards

[Snoopy]

I think your view of the convention centre is a bit off Snoopy (no offence).

Always glad to hear an alternative reasoned viewpoint.

The way I see things the business is fairly valued as is without the convention centre. Even if the convention centre goes ahead it is unlikely that the ROI will be much above cost of capital and also the payout period is quite some time away and risky, therefore I imagine the market will not rerate the stock higher in the short term. Part of the reason SKC want the convention centre is to extend a licence and further cement their position as a key part of the city. If anything I see it as a defensive investment to protect the company long term.

I should add that my model is showing a decrease in earnings for FY2013, (contrary to SKC management projections). This is not the same as forecasting a decrease in earnings as my model is not designed to predict FY2013 earnings with any accuracy. The reason my model is doing this is because last year's ROE (FY2012) was above the recent historical average. 'On average' SKC were batting above their average last year which tends to make them look cheaper than they actually are from a long term perspective, in my view.

You may be correct in your perception of value modandm.

Yes the NZ Convention Centre may not return much more than the cost of capital. But IMO the real benefit of the Convention Centre agreement will be whatever gains SKC can eek out of an new improved Casino licence for Auckland. And I do expect that to be worthwhile. The Convention Centre itself is just an extra to the main game from an SKC earnings perspective.

I have a different opinion to yours on the timeframe too. Short term I agree there are risks. From a long term perspective, with a vision and plan in place, I regard the potential NZ Convention Centre as reducing the Auckland site risk for SKC shareholders. And don't plan on earnings not increasing in the short term either as those RWC improvements bed in.

On the other hand should they not get the convention centre (which I see as highly unlikely), uncertainty and risk will be removed and the company will be looking at increased dividends or perhaps a share buy back once imputation credits are all used up. Overall this could be a significant positive for the stock.

I would say a buyback is unlikely while there are still other capital projects on the table. There is still a possible redevelopment of the Adelaide Casino to think about.

SNOOPY