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Thread: SKC - Sky City

  1. #561
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    Quote Originally Posted by Beagle View Post
    Disc: This hound finds eating food off the plate of addicted gamblers to be a distasteful experience
    It's a fairly reliable trading stock though: buy in the 300's sell in the 400's, then you can eat the food off a different group of addicted gamblers

  2. #562
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    Quote Originally Posted by winner69 View Post
    Share price seems to follow the form of the Warriors and the Blues - proud to be sponsors they say

    Good at supporting losers both on and off the field aren't they
    Took a small punt couple of months back when there was big sell down by a fund, however got rid of it on the day of announcement last month relating to Darwin write off...good riddens!!!

  3. #563
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    Quote Originally Posted by Biscuit View Post
    It's a fairly reliable trading stock though: buy in the 300's sell in the 400's, then you can eat the food off a different group of addicted gamblers
    LOL fair comment but I'm not game on sin stocks..you see what I did there with the pun
    Ecclesiastes 11:2: “Divide your portion to seven, or even to eight, for you do not know what misfortune may occur on the earth.
    Ben Graham - In the short run the market is a voting machine but in the long run the market is a weighing machine

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    Default 2/ Buffett Test 2 FY2017: Increasing ‘eps’ Trend (one setback allowed)

    Quote Originally Posted by Snoopy View Post
    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
    FY2017 $44.862m+0.72($0m-$0.762m-$0.534m) +($99.486m)= $143.415m 667.376m 21.5c

    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
    Year Normalised Net Profit {A} No. Shares EOFY {B} eps {A}/{B}
    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
    FY2017 $44.862m+0.72($0m-$0.762m-$0.534m) +($99.486m)= $143.415m 667.376m 21.5c

    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/ FY2017 result is adjusted for the write off of Darwin goodwill ($99.486m).
    5/ These are all 'actual profits'. I do not subscribe to using the 'normalised profits' that management seem to favour.

    There is no clear pattern of rising earnings per share here..

    Conclusion: Fail test

    SNOOPY
    Last edited by Snoopy; 28-08-2017 at 05:54 PM.
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    Default 3/ Buffett Test 3 FY2017: ROE > 15% over 5 years (one setback allowed)

    Quote Originally Posted by Snoopy View Post
    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
    Year Normalised Net Profit {A} S/h Equity EOFY {B}
    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%
    FY2017 $143.415m $1,070.9m 13.4%

    Despite the doubtful FY2016 result, this year saw a marked deterioration in high roller lending and NPAT losses in Darwin. The end of year write down of Darwin assets was not enough to offset the lower profits so ROE deteriorated.

    Conclusion: Fail Test

    SNOOPY
    Last edited by Snoopy; 29-08-2017 at 12:12 PM.
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    Default 4/ Buffett Test 4 FY2017: Ability to Raise Margins (3 year trend sufficient)

    Quote Originally Posted by Snoopy View Post
    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
    Year Normalised Net Profit {A} Revenues {B}
    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%
    FY2017 $143.415m $1,052.1m 13.6%

    FY2015, FY2016 and FY2017 shows a small but discernible that margin improvement.

    Conclusion: Pass Test

    SNOOPY
    Last edited by Snoopy; 28-08-2017 at 06:08 PM.
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  7. #567
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    Default Conclusion: Buffett Growth Model Suitability FY2017 Perspective.

    Quote Originally Posted by Snoopy View Post
    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.
    One year on and with the FY2017 results declared, it is time to resummarize our test results:

    BT1/ Strong position (top three) in chosen market (my post 506): Pass Test
    BT2/ Increasing 'eps' trend (my post 564): Fail Test
    BT3/ ROE > 15% consistently (my post 565): Fail Test
    BT4/ Ability to Increase Net profit margin (my post 566): Pass Test

    SKC is in the midst of two large development programs in Auckland and Adelaide. The capitalised interest payments will add to the final capitalised costs of these projects. This on top of the expected capital spend will make it hard for SKC to earn a good return on equity into the future. The setback in earnings at Darwin is permanent. The real bright spark in the portfolio is Hamilton which on some metrics now outperforms the flagship Auckland property. And all this with, I would imagine, mainly on the proposition of entertaining local customers. The Auckland property nevertheless performed well. Who knows how well it will perform when the Convention Centre is finished? But I do believe that some of the benefits of the Convention Centre (a licence for more gaming machines and gaming tables) have already been 'booked', before the full 'cost stream' of running that International Convention Centre has not yet been paid by shareholders.

    This Buffett type analysis relies on actual 'runs on the board' from the recent past. A pass of all four tests is required. On this basis neither the earnings per share trends, nor the returns on shareholder funds have a 'premium investment look'.

    Conclusion: SKC is not a suitable company to apply the Buffett growth model. An alternative method of valuation will be sought.

    SNOOPY
    Last edited by Snoopy; 29-08-2017 at 12:21 PM.
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    Default Capitalised Dividend valuation: FY2018 NZ Perspective

    Quote Originally Posted by Snoopy View Post
    The following is a record of all of the dividend payments over the last five years from a New Zealand perspective. 'From a New Zealand perspective' means that the investor concerned can take advantage of New Zealand imputation credits.

    Payment Date Dividend Imputation Percentage Declared Dividend Gross Dividend (I/C adjusted)
    17-03-2017 0% 10.0cps 10.0cps
    16-09-2016 50% 10.5cps 12.54cps
    16-03-2016 0% 10.5cps 10.5cps
    02-10-2015 33% 10.0cps 11.0cps
    02-04-2015 0% 10.0cps 10.0cps
    03-10-2014 100% 10.0cps 13.89cps
    04-04-2014 0% 10.0cps 10.0cps
    04-10-2013 100% 10.0cps 13.89ps
    05-04-2013 50% 10.0cps 11.94cps
    05-10-2012 60% 8.0cps 9.87cps
    Five Year Average 19.8cps 22.73cps

    Assuming a required rate of return of 6.5%, this translates to a share price of:

    $0.2273 / 0.065 = $3.50

    This is a 'business cycle average' valuation. My rule of thumb is that under different market conditions, the share price is liable to fluctuate up to 20% above and down to 20% below 'fair value'. This implies an 'all the ducks lining up' top of the market valuation of $4.20 cum dividend. At a $4.25 close on the market on Friday, but with a dividend payment of some 10c due within a couple of months, SKC is looking very fully priced using this valuation technique. Perhaps reducing one's holding on any market strength from here is the way to go?
    The following is a record of all of the dividend payments over the last five years from a New Zealand perspective. 'From a New Zealand perspective' means that the investor concerned can take advantage of New Zealand imputation credits.

    Payment Date Dividend Imputation Percentage Declared Dividend Gross Dividend (I/C adjusted)
    1x-03-2018 (*) 0% 10.0cps 13.89cps
    15-09-2017 50% 10.0cps 13.89cps
    17-03-2017 0% 10.0cps 10.0cps
    16-09-2016 50% 10.5cps 12.54cps
    16-03-2016 0% 10.5cps 10.5cps
    02-10-2015 33% 10.0cps 11.0cps
    02-04-2015 0% 10.0cps 10.0cps
    03-10-2014 100% 10.0cps 13.89cps
    04-04-2014 0% 10.0cps 10.0cps
    04-10-2013 100% 10.0cps 13.89ps
    Five Year Average 20.2cps 23.92cps

    (*) This dividend is a forecast. and in line with the company stated dividend policy. The very strong imputation credit balance (note 13, AR2017) indicates the final dividend ought to be fully imputed this year.

    Assuming a required rate of return of 6.5%, this translates to a share price of:

    $0.2392 / 0.065 = $3.68

    This is a 'business cycle average' valuation. My rule of thumb is that under different market conditions, the share price is liable to fluctuate up to 20% above and down to 20% below 'fair value'. This implies an 'all the ducks lining up' top of the market valuation of $4.42 cum dividend. At a $3.97 close on the market on Friday, but with a dividend payment of some 10c due within a couple of days, SKC is trading at a modest 5% premium to 'fair value' using this valuation technique. I already hold this share, and may look to buy more if the price slips below that $3.70 level.

    SNOOPY
    Last edited by Snoopy; 29-08-2017 at 12:41 PM.
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  9. #569
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    Where does the required rate of return of 6.5% come from? The Buffet criteria seems a better way to evaluate a company overall, although you would struggle to find anything in NZ to buy. Do you really want to buy a company that is not growing its earnings? A 6.5% dividend return might seem ok in this low interest rate environment, but what happens when interest rates rise? Presumably the yield won't look so flash and the share price will likely drop, so you would want to keep a sharp eye on where interest rates are heading if you buy into this now.

    Having said that, I've held this for many years with a bit of buying in the mid-low 300s and selling in the mid 400s along the way. It seems like quite a stable company with a fairly decent moat (I thought, but there has to be some question over that now).

  10. #570
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    Quote Originally Posted by Biscuit View Post
    Where does the required rate of return of 6.5% come from?
    I made the figure of 6.5% up. This is a return I personally would be happy with, considering the underlying nature of the Sky City business.

    Sky City casinos operate in markets where they are the sole casino player. These de-facto monopolies are mandated by government legislation. So in Buffett terms, this provides a very strong 'moat' for Sky City earnings. A strong moat, generally implies higher certainty of return. And that certainty is something that I am willing to pay a good price for. A good price, in this instance, refers to the fact that I am prepared to bid up the share price to the extent that I get a 6.5% yield over the business cycle.

    Of course, if you disagree that 6.5% is acceptable - and that different people may have different opinions on this - then you can plug in the gross return rate that you are happy with and a different valuation will come out. A 6.5% return is a reflection of my own opinion, forged by the ups and downs of many years of investing. But I do consider that others could form an alternative 'acceptable interest return' view based on their own experiences that may not equate to my own.

    The Buffet criteria seems a better way to evaluate a company overall, although you would struggle to find anything in NZ to buy.
    Buffett has a policy of buying few investments out of the investment pool that is available to him. So yes, the Buffett growth criteria do provide a high investment hurdle.

    Do you really want to buy a company that is not growing its earnings?
    It all depends on the price the shares are offered to you. If the yield is good enough on a no growth share, then you should buy it.

    The other way of looking at this is that if you can buy a share at a good price based on 'no growth', and the share does end up growing then you get the growth for free. Getting something for nothing is generally a good investment strategy.

    A 6.5% dividend return might seem ok in this low interest rate environment, but what happens when interest rates rise? Presumably the yield won't look so flash and the share price will likely drop, so you would want to keep a sharp eye on where interest rates are heading if you buy into this now.
    I have selected 6.5% on the assumption that interest rates will rise. I think if bank deposit rates increase to 4% or even 5%, then 6.5% on Sky City will still look attractive. However if enough shareholders do not find 6.5% attractive then you are quite right. The SKC share price may indeed fall.

    Having said that, I've held this for many years with a bit of buying in the mid-low 300s and selling in the mid 400s along the way. It seems like quite a stable company with a fairly decent moat (I thought, but there has to be some question over that now).
    What part of the moat do you feel is now in question? The Auckland casino licence pushed out to 2048 with a further 15 year right or renewal, makes the moat more secure than it has been in a long time, from my perspective.

    SNOOPY
    Last edited by Snoopy; 29-08-2017 at 06:27 PM.
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