1/ Buffett Test 1 FY2016: Top Three Position in Chosen Market
Quote:
Originally Posted by
Snoopy
At any rate we are well overdue for an updated good look at SKC.
Sky City Entertainment is the sole operator of casinos at five distinct locations across Australasia. The relative size of revenues for FY2017 is shown in the table below.
Sky City Business Units |
Revenue |
Percentage |
Auckland |
$507.021m |
50.7% |
Hamilton & Queenstown |
$59.370m |
5.9% |
Adelaide |
$152,993m |
15.3% |
Darwin |
$117.872m |
11.8% |
"High Rollers" |
$162.391m |
16.2% |
Total |
|
100% |
‘Revenue’ encompasses casino, hotel, food, beverage and, at the Auckland business unit, tourism revenue associated with the Sky Tower. Casino revenues represent the ‘net win’ to the casino from gaming activities. (‘Amounts Wagered’-’Amounts Won by Punters’). In FY2016 77% of revenue came from gaming and 23% from a combination of hotel food and beverage. The EBIT picture is much more skewed, with 69.3% of EBIT coming from Auckland in FY2016. ,
Sky City is the only licensed casino operator in the geographic centres in which it operates. It is hard to imagine a stronger market position than this.
Conclusion: Pass Test
SNOOPY
2/ Buffett Test 2 FY2016: Increasing ‘eps’ Trend (one setback allowed)
Year |
Normalised Net Profit {A} |
No. Shares EOFY {B} |
eps {A}/{B} |
FY2012 |
$138.870m+0.72($4.274m-$1.756m-$0.582m)= $140.264m |
576.958m |
24.3c |
FY2013 |
$127.382m+0.72($3.235m-$0.947m+$0.249m)= $129.209m |
576.958m |
22.4c |
FY2014 |
$98.537m+0.72($9.170m-$0.995m-$2.125m)-0.72($0.934m)= $102.221m |
582.088m |
17.6c |
FY2015 |
$128.744m+0.72($4.316m-$1.348m-$1.077m)= $130.106m |
587.473m |
22.1c |
FY2016 |
$145.672m+0.72($1.553m-$0.944m-$0.709m) +0.72($2.7m+7.6m)= $152.319m |
656.987m |
23.2c |
Notes:
1/ Each year’s profit is adjusted for ‘restructuring costs’, ‘property plant and equipment sales’ and ‘exchange rate contract losses/gains’.
2/ FY2014 result adjusted for sale of the Christchurch Casino shareholding.
3/ FY2016 result is adjusted for $2.7m of planning expenses from the abandoned Hamilton hotel project and $7.6, representing the book value of a now demolished car park on the Auckland Convention Centre site.
4/ These are all 'actual profits'. I do not subscribe to using the 'normalised profits' that management seem to favour.
We see a steady drop in 'eps' over three year before two years of recovery.
Conclusion: Fail test
SNOOPY
3/ Buffett Test 3 FY2016: ROE > 15% over 5 yeras (one setback allowed)
Year |
Normalised Net Profit {A} |
S/h Equity EOFY {B} |
FY2012 |
$140.264m |
$809.1m |
17.3% |
FY2013 |
$129.209m |
$812.9m |
15.9% |
FY2014 |
$102.221m |
$773.8m |
13.2% |
FY2015 |
$130.106m |
$816.9m |
15.9% |
FY2016 |
$152.319m |
$1,113.0m |
13.7% |
The FY2016 result is a little unfair. The end of the financial year is 30th June. So the $263m of new capital raised from shareholders in June 2016 was only on the books for a month. If I remove this new shareholder equity from my calculation I get an ROE for FY2016 of:
$152.319m/ ($1,113m - $263m) = 17.9%
On this basis I am prepared to overlook the failure for FY2016.
Conclusion: Pass Test
4/ Buffett Test 4 FY2016: Ability to Raise Margins (3 year trend sufficient)
Year |
Normalised Net Profit {A} |
Revenues {B} |
FY2012 |
$140.264m |
$960.2m |
14.6% |
FY2013 |
$129.209m |
$970.7m |
13.3% |
FY2014 |
$102.221m |
$928.2m |
11.0% |
FY2015 |
$130.106m |
$1,037.0m |
12.5% |
FY2016 |
$152.319m |
$1,131.5m |
13.5% |
Despite the net profit margin being less than five years ago, the turnaround trend over the last three years shows that margin improvement is still possible.
Conclusion: Pass Test
SNOOPY
Conclusion: Buffett Growth Model Suitability FY2016 Perspective.
SKC is not a suitable company to apply the Buffett growth model to right now, because the the 'earnings per share' increasing trend that is required is not there. This doesn't mean that SKC is necessarily a poor investment though. It just means that we need a different method to analyse the likely investment potential from here. And that means rolling out the 'Capitalised Dividend Model' method (!). Stay tuned.
SNOOPY
discl: hold SKC