Buffett Test 1 FY2017: Top Three Position in Chosen Market
Quote:
Originally Posted by
Snoopy
discl: sniffing, not holding.
Skyline Enterprises mission statement is to provide world class leisure and enertainment experiences that appeal to a wide range of guests that are positioned as quality products command a premium price and provide a high return on investment for our shareholders.
Gondola Operations: External Turnover $131.4m (includes $15.2m from Singapore and $5.7m from other overseas)
Skyline Enterprises was formed by a group of Queenstown tourism business enthusiasts. They were driving tourists up a rough metal road in a VW Combi to ‘Bob’s Peak’, to enjoy a mountain vista of Queenstown township and the Remarkables Mountain range over a cup of tea. There had to be a better way. And following a 1966 capital raising, the original ‘Skyline Gondola’ at Queenstown, opening in 1967, was the result.
Roll forwards 50 years and ‘Gondola Queenstown’, already upgraded to four seaters (1987), is on the cusp of being upgraded again to ten seat gondola cars. ‘Gondola Rotorua’ provides a similar experience in the North Island. Both Gondolas support Luge runs. Unlike the Olympic Luge, the Skyline interpretation puts plastic karts with haul brakes on a contoured asphalt track. Thus overtaking is allowed and bottlenecks are avoided. This ‘luge technology’ incorporates Intellectual Property that has since been partnered internationally: Canada ( Mt Tremblent {2003}, Calgary Winsport Olympic Park {2013}), Singapore ( Sentosa Island {2004}), South Korea ( Tongyeong {2016) , Busan {pending 2019}). The UK and Europe are on the development horizon. Hospitality developments crown each hilltop station.
My ‘Gondola Operations’ heading incoporates the fully owned non-Gondola domestic ‘Totally Tourism’ operations. Totally Tourism’s focus is on two major areas; South Island helicopter operations and Milford Sound (Milford Sound Flights and Mitre Peak Cruises) with the related heliski, helihike and Combo operations supporting these areas. These are iconic tourism operations in their own right.
With world leading technology and a proven international growth path, the core business of SKE ticks the ‘significant market player’ box.
Christchurch Casino: (External Turnover $62.030m )
Skyline Enerprises is the only licenced casino operator in Christchurch. They have fully owned the Christchurch Casino from 24 December 2012, after buying out former partner ‘Sky City Entertainment’. Casino revenue includes the net aggregate of Casino wins and losses. The Casino includes entertainment and dining venues. Skyline also owns a 33% share of the Dunedin casino. But this is accounted for under the ‘All Other Segments’ segment. As the sole Casino licence holder in Christchurch, the significant market player box is ticked.
Property Investment: (External Turnover $5.403m)
The company owns Queenstown’s largest retail complex O’Connell’s Pavilion, Eichardt’s Hotel on the lakefront and the adjacent ‘New Eichardt’s Building’ offering a mix of accommodation, office, restaurant and retail spaces. Skyline is the landlord, not the operator of these properties. Prime property space is in short supply ln Queenstown and these assets are highly prized.
(Largely) Accommodation: (External Turnover $6.797m)
The two principal hotels/accommodation ‘owner run’ are the ‘Mercure Leisure Lodge’ in Duke Street Dunedin, and ‘Blue Peaks Apartments’ in Coronation drive in Queenstown.
Overall View
There is plenty of competition in the hotel/accommodation market. But all of the other business units are very strong or unique entertainment propositions.
Conclusion: Pass Test
Buffett Test 2: FY2017: Increasing ‘eps’ Trend (one setback allowed)
For this table the 'normalised net profit' excludes:
a/ property revaluations,
b/ insurance payouts ( FY2014 and FY2017)
c/ the gains on sales of Property Plant and Equipment (FY2015) and
d/ other non-operating adjustments such as exchange rate gains or losses.
Year |
Normalised Net Profit {A} |
No. Shares EOFY {B} |
eps {A}/{B} |
FY2013 |
$31.245m |
34.094m |
$0.92 |
FY2014 |
$22.656m |
34.137m |
$0.66 |
FY2015 |
$34.137m |
34.137m |
$1.02 |
FY2016 |
$41.718m |
34.137m |
$1.22 |
FY2017 |
$45.799m |
34.137mm |
$1.34 |
The FY2014 result was torpedoed by my removal of a $10.934m insurance payout from the Skyline declared result. The Skyline declared result masked the decline in profit of the gondola division of which the profit dived from $22.862m to $16.959m. This decrease was related to business interruption caused the construction off new top and bottom terminals at Sentosa Singapore and construction problems of the new luge in Calgery Canada. These issues were resolved by FY2014 year end,
Take FY2014 out and there is a very pleasant eps growth trend apparent.
Conclusion: Pass test
SNOOPY
Buffett Test 3 FY2017: ROE > 15% over 5 years (one setback allowed)
Year |
Normalised Net Profit {A} |
S/h Equity EOFY {B} |
ROE {A}/{B} |
FY2013 |
$31.247m |
$215.925m |
14.5% |
FY2014 |
$22.656m |
$243.316m |
9.3% |
FY2015 |
$34.809m |
$282.854m |
12.3% |
FY2016 |
$41.718m |
$321.356m |
13.2% |
FY2017 |
$45.799m |
$370.666m |
12.4% |
Ostensibly this looks like a clear cut fail. But wait. The asset values on the books include assets that have been revalued upwards. This increase in underlying asset value is due to the fact that this business has performed well, yet the increased valuation has cost shareholders nothing. It would be wrong to assess the return on equity when some of that equity has been created out of 'thin air'. So how much 'thin air capital' has appeared on the books since FY2013?
|
Investment Property Revaluation |
Christchurch Casino Revaluation |
Since FY2013 Cumulative Revaluation |
FY2013 |
$0.704706m |
$45.127614m |
$45.832317m |
FY2014 |
$7.881456m |
$0m |
$53.713773m |
FY2015 |
$16.709649m |
$0m |
$70.423422m |
FY2016 |
$10.114310m |
$0m |
$80.537741m |
FY2017 |
$20.254664m |
$0m |
$100.792405m |
Next we take the ‘accumulated thin air capital’ away from the declared sharehokdes funds so that we are only considering a return on capital earned on shareholders real money
Year |
Normalised Net Profit {A} |
S/h Equity EOFY {B} |
ROE {A}/{B} |
FY2013 |
$31.247m |
$170.093m |
18.4% |
FY2014 |
$22.656m |
$189.603m |
9.3% |
FY2015 |
$34.809m |
$212..431m |
16.4% |
FY2016 |
$41.718m |
$240.819m |
17.3% |
FY2017 |
$45.799m |
$269.874m |
17.0% |
Suddenly the results look very different! There may be more equity revaluations prior to FY2013 that will increase the underlying ROE further. But I haven't bothered to look, because for the purpose of this exercise I don't need to. A pass is a pass.
Conclusion: Pass Test
SNOOPY
Buffett Test 4 FY2017: Ability to Raise Margins (3 year trend sufficient)
Year |
Normalised Net Profit {A} |
Revenues {B} |
FY2013 |
$31.247m |
$96.862m |
32.3% |
FY2014 |
$22.656m |
$150.634m |
15.0% |
FY2015 |
$34.809m |
$162.945m |
21.0% |
FY2016 |
$41.798m |
$180.504m |
23.1% |
FY2017 |
$45.799m |
$198.309m |
23.1% |
Despite the net profit margin being significantly less than five years ago, the turnaround trend over the last three years shows that margin improvement is still possible.
Conclusion: Pass Test
SNOOPY
Buffett Test Summary FY2017
All four tests have been passed, so this means we can apply the Buffett growth model with some confidence. There is one more hurdle to pass before we do that though. It is possible for a company to produce very high Return on Equity figures by borrowing to the hilt. This would be an unacceptable risk in this investment context. So time to evaluate the debt profile of SKE
SNOOPY
MDRT check: FY2017 Perspective
The question I wish to pose is this. If SKE wanted to direct all of their underlying earnings into paying off debt, how long would that take?
Bank Debt |
$28m {A} |
Underlying Net Profit After Tax |
$45.799m / year {B} |
Minimum Debt Repayment Time |
0.61 years {A}/{B} |
Being able to pay off all your company debt within 8 months is an enviable position to be in. So we can now proceed to the 'Buffett Growth Model' and see what kind of numbers pop out. Don't take this post as an endorsement to buy SKE yet though. All I have looked at so far is what you get, and what you get looks very good. From an investment perspective though, the most critical thing is what you pay. And I haven't made any assessment at all about market value yet. Paying too much for something good is not good investment practice. So how much would be too much to pay for SKE? Let's see.
SNOOPY
Buffett Growth Model FY2017 perspective: the data....
Time to apply the Buffett growth model. The key pieces of data are:
1/ The business cycle return on shareholder equity,
|
FY2013 |
FY2014 |
FY2015 |
FY2016 |
FY2017 |
Average |
ROE |
14.5% |
9.3% |
12.3% |
13.0% |
12.4% |
12.3% |
We use this figure to work out the projected earnings from the start of the financial year shareholder equity.
2/ The proportion of equity retained each year to grow the business.
|
FY2013 |
FY2014 |
FY2015 |
FY2016 |
FY2017 |
Average |
dps/eps |
35% |
56% |
36% |
34% |
41% |
40.4% |
We use this figure to derive: (a) the proportion of earnings retained for future growth and (b) paid out as dividends.
3/ The multiple the market has applied to future earnings.
|
FY2013 |
FY2014 |
FY2015 |
FY2016 |
FY2017 |
Average |
Share Price @ 31st March {A} |
$8.45 |
$10.80 |
$12.75 |
$17.10 |
$20.55 |
NM |
eps {B} |
$0.92 |
$0.66 |
$1.02 |
$1.22 |
$1.34 |
NM |
PE Multiple @ 31st March {A}/{B} |
9.2 |
16.4 |
12.5 |
14.0 |
15.3 |
13.4 |
We use this figure to determine the value of the company in ten years time, based on teh expected earnings in ten years time.
Now we have the key pieces of data, we can proceed to create the earnings projection spreadsheet
SNOOPY
Buffett Growth Model FY2017 perspective: the calculation
Now we have the key pieces of data, we can proceed to create the earninhgs projection spreadsheet
Year |
Equity SOFY |
Earnings |
Dividend Paid |
Retained for Reinvestment |
2018 |
$10.86 |
$1.34 |
$0.54 |
$0.80 |
2019 |
$11.66 |
$1.43 |
$0.58 |
$0.85 |
2020 |
$12.51 |
$1.54 |
$0.62 |
$0.92 |
2021 |
$13.43 |
$1.65 |
$0.67 |
$0.98 |
2022 |
$14.41 |
$1.77 |
$0.72 |
$1.06 |
2023 |
$15.47 |
$1.90 |
$0.77 |
$1.13 |
2024 |
$16.60 |
$2.04 |
$0.83 |
$1.22 |
2025 |
$17.82 |
$2.19 |
$0.89 |
$1.31 |
2026 |
$19.13 |
$2.35 |
$0.95 |
$1.40 |
2027 |
$20.53 |
$2.52 |
$1.02 |
$1.50 |
2028 |
$22.03 |
$2.71 |
Ten Year Dividend Total |
|
|
$7.57 |
We now answer the question: What return can we expect, compounding annually for ten years, if we buy shares in Skyline at $24.60 today?
p(1+i)^10=(13.4*2.71 + 7.57), p= $24.60 (today's share price)
<=> (1+i)=[(13.4*2.71 + 7.57)/24.60]^0.1
=> i = 5.96%
So the net average compounding return we can expect by investing in Skyline today at $24.60 over ten years is 6% per year. With tax at 30% this is equivalent to a gross return average of 8.5%. Not bad, but given the development risk ahead, not a good enough return for me. Warren Buffett looks for a 15% compounding return. What share price would he have to buy at to get this?
Buffett Price
p(1.15)^10=(13.4*2.71 + 7.57) => p= $10.85
If the share price ever got down to $10.85, I would be backing up the truck myself. But such a low share price in the future seems very unlikely. Considering the quality of the underlying assets I would consider a 12% compounding return over 10 years acceptable. What purchase share price does that imply?
Snoopy Growth Price
p(1.12)^10=(13.4*2.71 + 7.57) => p=$14.13
What we have here are some price points at which the purchase of Skyline Enterprises shares looks good depending on what return you the investor sees as acceptable. For me a 6% net return is not high enough. SKE is a fantastic company. But it is very fully priced by Mr Market when stacked up against historical metrics. I would not recommend buying any at $24.60. But I do recommend watching and waiting for a better entry price!
SNOOPY