FY2013 Profit Result Evaluation
Quote:
Originally Posted by
Snoopy
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.
If the convention centre is approved, the SKC share price I think would break the $4 barrier.
As a long-term shareholder, I have just finished my annual ‘stocktake’ on SKC.
I bought my very first SKC shares in 1999. But I now have a median holding time of 5 years on my total SKC holding. My average acquisition price is $2.77, thanks to a big top up I did at capital raising time in 2009. Market price today has risen to $4.15. Cash dividends of 76.75c per share were paid over the five years. That adds up to a compounding annual total return of 12.2% per annum net, all since the GFC! That’s about 17% gross on a one-year annualized basis. I am more than happy with my SKC return. Without it, I wouldn’t have been able to outperform the NZX market by as much as I have for so long. However, I do believe the party music for SKC is about to stop. Read on to find out why!
I view SKC as an Auckland ‘growth engine’ supporting other lesser casino operations around Australasia. Since the last SKC capital raising in 2009, the dollar return on the Auckland site has largely flat-lined, even as a large amount of capital has been spent. ROE ‘Auckland’ has dropped from 25% to 20% (still good). This is expected. Much money was required to refurbish the casino, Sky City and Grand hotels and to develop Federal Street. This spending will not slow as the new International Convention Centre is built. The spending, while necessary, will not bring instant or even medium term further riches to shareholders. Indeed the International Convention Centre carries both property development risk and marketing implementation risk. Both now fall squarely 100% on SKC shareholders shoulders, not the government. I am enthusiastic about the long-term future of the International Convention Centre. Nevertheless, I can see ‘speed bumps’ along the way.
The first ‘speed bump’ is the Convention Centre build cost blowout: From an envisaged $350m to over $400m. $400m represents some 70c per share, which is 35c of equity if the build is done on a debt equity ratio of 50:50. Current NTA is $1.41. Therefore, this is a big commitment even for a company as well capitalized as Sky City. Moreover, I haven’t even mentioned what SKC is set to pour into the Adelaide redevelopment! The change in dividend policy to a minimum 20cps annual pay out will help support the SKC share price in the short term. However, it will also mean the time taken to save the underlying ‘incremental capital’ from retained earnings to underwrite future building programs is stretched out.
To counter the flat to deteriorating medium term picture in Auckland, the Australian operations in Adelaide and Darwin are slowly lifting their game. This is perhaps best reflected in my own calculated ‘non Auckland’ ROE which has risen from 7.7% in 2009 to 9.4% in 2013. This trend is promising. Yet the fact remains that profitability of all ‘non Auckland’ operations, as a group, is only half that of the Auckland site. Another positive of the Australian renaissance though, is that SKC are now paying Australian imputation credits to Australian shareholders. That has to boost demand for SKC shares from Australia.
Basic assumptions of my SKC ‘equity growth’ model are as follows:
1/ ROE for ‘Auckland’ is 24%, and ROE for ‘Non-Auckland’ 8.8%. (These are the actual averages over the last five years.)
2/ Future share price based on a PE of 17.1 (actual operational average over last ten years)
3/ Annual dividend the maximum 80% of future earnings, or 20cps whichever is the larger. I calculate dividend will remain at 20cps until 2021.
4/ Retained earnings supplemented by limited share reinvestment plan amounting to 1cps per year.
Significant differences from last year are:
1/ The higher dividend payout ratio, up from 70% to 80%
2/ ‘ROE Auckland’ slightly lower (-1%) and ‘ROE Non–Auckland’ slightly higher (+0.2%)
3/ PE increased from 17.0 to 17.1
4/ Base share price increased from $3.80 to $4.15 to reflect the SKC share price rise over the year.
The net result of these changed assumptions is that my expected 10-year annual overall return has sunk from 9.53% to 7.0% gross. The biggest effect was the share price rise over the year building more future earnings into today’s share price, but conversely leaving less to come on the table in future years.
In summary, my opinion: If you are now overweight in SKC, then some time over the next few months would be a good time to reduce your holding. However, if you are happy with a reasonably reliable 4.9% annual return going forwards, equivalent to about 7% gross, then keep your shares. I will be keeping mine. I don’t see a big fall in the SKC share price coming because the declared 20cps minimum annual dividend policy going forwards should underpin the share price at around $4. But neither do I expect the share price to be above $5 in ten years time. From an investor perspective, I see SKC as becoming ‘rather boring’, which is not always a bad thing.
SNOOPY