SKC - Sky City

[Snoopy]

and we have no insider trading in NZ?

The best way to get insider information is to just go inside. There is nothing secretive about this process. All you need is a pair of respectable shoes, as those Sky City casinos are open to the public.

I recently fulfilled an ambition to inspect Sky City's operation in Darwin. Despite what you may read elsewhere, I think Darwin will be the key to the long term outperformance (or not) of this company.

My visit was brief, an hour and a half on a Wednesday afternoon, but it did give me a first hand insight of what is happening up there.

At the macro level you can forget the 'R' word. There is no recession in the far North of Australia, as evidenced by property prices that are still moving ahead, and those construction cranes reaching up into the downtown skyline. The population of greater Darwin (including Palmerston and Lichfield) is around 120,000 people and is growing at around 2.6% per year. I was a bit worried about Sky City being 'out of town' on the map. However Darwin is a very compact city. 'Downtown' is within walking distance of the casino if you are used to the temperatures.

My first impression of Sky City Darwin is that it is a resort before it is a casino. The bunker like architecture (perhaps a good thing in a hurricane prone zone) is really a base to use the golf course, tennis courts and swimming pool facilities and oh yes the casino that happens to be attached. Sky City Darwin is actually right on the beach, and very attractive Mindil Beach looked too. However, the Northern Territory has these things called salt water crocodiles and also stinger jellyfish which can be lethal. So as attractive as the swimming looks, and as encouraging as the weather is at enticing you to go in, locals just don't swim at this beach, or any beach.

There are several restaurants at Sky City Darwin and there is an amazing Monday/Tuesday/Wednesday lunch deal which lets you each as much as you like from the Buffet restaurant for only $A13. You can then sit overlooking the extensive waterworld of swimming pools while you consume a multi course meal, soft drinks included. After that 'wetting of my appetite' I was disappointed to learn that you had to be a paying hotel guest to take a swimming pool dip. The other type of pool dip was catered for as you could play Keno during lunch if you had to. Perhaps I ate a bit too much or ate the wrong thing, but after I had finished my meal I got a slight tummy upset. It must be said that the casino coveniences, when I had to pay them a quick visit, could have been cleaner. Accommodation wise, I went as far as the hotel foyer. There I saw an impressive line up of tourism award gongs, and the smiles on the faces of the guests did leave me with the impression that it was all genuinely earned.

I had a good walk around the casino area, and was surprised at the number of tables (and pokie machines) being used in the middle of a hot day. Mind you in Darwin every day is hot (the coldest day of the year equates to some 28 degrees C). So perhaps 3pm on a Wednesday afternoon is just the time to be inside?

There had been some refurbishment of the playing area just recently. But without the 'before' experience, it looked like all of the money had been spent bringing the building up to where it should be. I got no 'wow' effect. One thing that was just getting the finishing touches while I was there were the new 'smoking balconies', all ready for when the smoking ban comes in to the Northern Territory. These look like they will work well as they will allow smokers out of the gaming area to not lose the ambience of the Sky City Darwin experience. That means there is interior design flow between the smoking areas and the gaming floor.

Overall then I was pleased with what I saw, while acknowledging that there may be room for improvement in the 'cheap restaurant' food hygiene and toilet cleaning rosters. Anyone else been up to Darwin to have a look? I would be interested to hear how your impressions compare to mine.

SNOOPY

discl: hold SKC

[Nitaa]

Hi Snoppy. I think you views on Darwin is not logical. SKC Auckland has I guess a population base of around 1.4m, Adelaide about 1m people to draw on. In the whole scheme of things Darwin is and should be considered a supplementory add on to their portfolio.

With Singapore building their casino, Malaysia having one in Genting Highland, the close proximaty of Maccau in Hong Kong doesnt really make Darwin a primary choice destination for junket and high rollers action. Maybe i missed something but Darwin will not be a company maker or breaker imo. On a different tangent it does increase their exposure into the Australian market but are too small to have an impact on the bigger players (meaning the other big casino operators)there.

[Snoopy]

Hi Snoopy. I think you views on Darwin is not logical. SKC Auckland has I guess a population base of around 1.4m, Adelaide about 1m people to draw on. In the whole scheme of things Darwin is and should be considered a supplementory add on to their portfolio.

Logically you are right Nita. The problem with the logical view, as I see it, is that SKC have had ten years to make something of Adelaide. And despite this years profit improvement Adelaide still doesn't generate anywhere near the profit in overall dollar terms for SKC that Darwin does. Futhermore the Adelaide Casino is not really near the centre of town so it is not an impulse destination. Adelaide is not growing as fast as Darwin, so we can't rely on natural population increase to drive profits in Adelaide in the right direction. Attempts to fix Adelaide ran into planning permission delays, the sticking point of a less generous casino license agreement and the cost of capital not being recovered from those improvements that were made.

Quite a different attitude appears prevalent in Darwin. Up there the local council are right behind Sky City and all their development plans. It sounds incredible but I can see the earnings margin in Darwin rising above the earnings margin in Auckland once the world cup fever has died down in three or four years.

Despite its small population base SKC Darwin is the second biggest earner for SKC right now, behind the Auckland casino/hotel site. Short of massive capital expenditure to move and rebuild the entire Adelaide casino to a modern well located purpose built casino venue, I can't see any other SKC asset usurping Darwin's contribution.

With Singapore building their casino, Malaysia having one in Genting Highland, the close proximaty of Macau in Hong Kong doesnt really make Darwin a primary choice destination for junket and high rollers action. Maybe i missed something but Darwin will not be a company maker or breaker imo.

Darwin has never been a destination for high roller Asian gamblers on a meaningful scale Nita, despite what SKC wants you to believe. SKC Darwin are doing well servicing the locals and the Australian and New Zealand tourists. If the high rollers don't come down from Asia, then SKC Darwin will continue on its current trajectory, which has been very impressive without the need for any Asian high roller roll up.

On a different tangent it does increase their exposure into the Australian market but are too small to have an impact on the bigger players (meaning the other big casino operators)there.

You see the Australian market differently to how I do Nita. I see Adelaide and Darwin as off the main tourist trail and as separate and isolated monopoly markets. Perhaps Sydney and Melbourne casinos compete but IMO they largely do not compete with the SKC casinos within Australia.

SNOOPY

[Nitaa]

Snoopy. You missed some of my points but i give you some credit for your comment on Darwin. I personally worked for SKC for 9 years right from the very beginning. Much of it was well planned by Evan Davies and the exiting of Harrahs as the operator.

With regards to expansion, SKC primary (after establishing locally) goal was to tap into the Australian market. Adelaide was their easiest choice. A safrice in terms of ROI but it gave them credabilty to secure Darwin. Other opportunities would have presented themsleves and they did take it up on the highly failed Canbet. They simply didnt not have enough expertise and quickly crumbled when the leading bookie left.

SKC is still an interesting prospect even more so since they have lowered their debt to equity ratio. There will be some of the bigger players looking at a possible aquisition imo whether a few months down the track or a bit longer.

[ratkin]

I recently fulfilled an ambition to inspect Sky City's operation in Darwin. Despite what you may read elsewhere, I think Darwin will be the key to the long term outperformance (or not) of this company.

My visit was brief, an hour and a half on a Wednesday afternoon, but it did give me a first hand insight of what is happening up there.

SNOOPY

discl: hold SKC

Looks like your inspection of Darwin casino was spot on. Results out today and it the two aussie casinos leading the way in growth terms.
Market seems to like todays result , Overall earnings per share not improved much , but it good steady as she goesw result with nothing bad happening

[Snoopy]

How well have I done out of SKC? I have been a shareholder since the BIL sell out a long 11 years ago. However the median holding time for my holding is just 4 years and 2 months. In those 4.167 years I have received a total of 54.9cps in dividends. A ‘buy and hold’ investor buying at that time would have paid $4.40 per share. My average purchase price is $2.60. So purchase timing, has been brilliant.

My total return has been (2.60) (i^ 4.1667)= (3.16+0.549), where ‘i’ works out at 1.089. This represents a compounding gain of 8.9% per year.

Over that same time period the NZX50 has declined from 4000 to 3300. That represents a loss of:

4000(f^4.1667)=3300, where ‘f’ works out as 0.955.

This represents a compounding loss of 4.5% per annum. My net gain relative to the NZX50 index is therefore 13.4% per year compounding and after tax.

SNOOP

[Snoopy]

My average purchase price is $2.60. So purchase timing, has been brilliant.

How did I get this so right? Being in near the beginning, when BIL was selling out, helped: the entry price then was $1.89 equivalent. Selling some shares when I got top heavy at $5.12 helped too. My third ace was buying as many shares as I could in the 2009 capital raising at $2.61. Then buying some more on the market at a similar price, right at the time almost everyone else was advocating selling out. Buy when a corporate is forced to restructure, sell high and buy in some more when everyone else is short of cash at capital raising time. Perhaps there is a lesson here somewhere?

SNOOPY

[Snoopy]

However the median holding time for my holding is just 4 years and 2 months. In those 4.167 years I have received a total of 54.9cps in dividends.

I should point out that actual dividends declared were much greater than 54.9c over my median owning period. But for a lot of that time the dividend reinvestment plan was operating. So I used those dividends to purchase more shares rather than bank the cash. This is a choice. I cannot bank the cash dividends and use the money to buy shares in the DRP. So I elected to take those dividends as shares which proportionately reduced my cash dividend harvest.

SNOOPY

[Dworsf01]

Glad to hear you've done well, Snoppy. My own small holding of SKC has been a bit of a disaster. Being my first stock purchase (before the GFC) I've watched it's value slowly slip away on account of it's small size (making selling a difficult decision given commission's relative size) and my lack of experience. The SP seems to just be tracking sideways - what's your take on it at present? Worth holding?

[Contrarian]

Gidday
It's a cash cow/flow situation. I go in every so often to loose a bit on blackjack.It is always full of asian housewives inevitably loosing the formulated amount.
I hope the Gummint have their hands full, dealing to the big sins of lungs & livers etc & leave skc to do what they do best, clipping tickets of mugs.