SKC - Sky City

[Snoopy]

The indebtedness of a company is one factor that influences 'investment risk'. 'Investment risk' influences the return a new investor into Sky City today might expect.
Sky City earned $146.847m in normalised profit over FY2016. When you stack this up against the corporate loans that the company must eventually repay:

Current Loans	$38.028m
Non-Current Loans	$389.032m
Total Loans	$427.060m

then the 'minimum debt repayment period' (MDRP) is a mere:

$427.060m / $146.847m = 2.9 years

That is expectedly (given the cash issue a month before balance date) low. Yet there was a reason behind the cash issue. SKC has committed to spending $NZ700m at the Auckland site, the majority of that going towards the new Convention Centre. Furthermore, Sky City is committed to spending $A300m ($NZ333m assuming $A0.9 =$NZ1-) more on the Adelaide development. These are huge committed costs, largely not reflected on the books as at 30-06-2016.

We are told that during the year $8.674m of interest has been capitalised at an interest rate of 6.03%. This implies capital expenditure of:

$8.674m / 0.0603 = $143.8m

I believe that this money relates to capital already spent developing the Auckland site. So this leaves:

$700m - $144m = some $556m still to spend

If we add the Auckland and Adelaide expected development debts to the company debt as at 30th June 2016, a different picture of indebtedness emerges.

Current Loans	$38m
Non-Current Loans	$389m
Incremental Auckland Indebtedness	$556m
Incremental Adelaide Indebtedness	$333m
Total Loans	$1,316m

The MDRT now blows out to:

$1,316m / $152.3m = 8.6 years

I would describe this as getting towards the high end of 'medium indebtedness'. This is not unusual for a company with a relatively secure recession resistant cashflow stream available. I haven't considered any reinvestment via the dividend reinvestment scheme which would reduce this figure. But it is clear to me that SKC does not have a lot of room to move on any other capital initiatives.

Personally I am comfortable with the way SKC is managing its capital requirements, particularly as those very generous fellows at Fletcher Building have agreed to pick up all cost overruns on the Auckland site at least. I reckon retiring Flectcher CEO Mark Adamson deserves a seat on the SKC board - equivalent to a 'nod' (if the Convention Centre was a project the government had paid for I would have expected 'Sir Mark' to be knighted) - for all of the 'construction value' that he has generously donated to managing the Auckland Convention centre costs.

Yet 'medium to high' expected debt is 'medium to high' expected debt. Despite the likelihood of strong future cashflows, I will require a 6.5% gross return on my investment in SKC to make an investment deal in SKC today, work for me.

SNOOPY