SKC - Sky City

[hardt]

What in your mind makes them a buy at the moment hardt?

This is not a long term buy for me, I have a target in mind and I will try not to be greedy with it.

Reversion to mean occurs more often than not after such a selldown and I expect the bulls behind SKC to see it back into 430+... I do not see much downside in holding for a short term from my entry.

[freebee]

Here it is:

SHINTR: SKC: SPH Notice - Artemis Investment Management LLP

Disclosure of ceasing to have substantial holding


To NZX Limited

and

To Skycity Entertainment Group Ltd

Date this disclosure made: 29/06/2017

Date last disclosure made: 07/04/2017

Date on which substantial holding ceased: 28/06/2017

Substantial product holder(s) giving disclosure

Full name(s): Artemis Investment Management LLP

Summary of previous substantial holding

Class of quoted voting products: Ordinary shares

Summary for Artemis Investment Management LLP

For last disclosure,--
(a) total number held in class: 33,556,824
(b) total in class: 667,376,523
(c) total percentage held in class: 5.03%

For current holding after ceasing to have substantial holding,--
(a) total number held in class: 0
(b) total in class: 667,376,523
(c) total percentage held in class: 0%

Details of transactions and events giving rise to ceasing of substantial
holding

Details of the transactions or other events requiring disclosure:

A sale of 35,372,990 shares vs NZD 143,260,609.50 with trade date 28/06/17
and settlement date 30/06/17.

[winner69]

Freebie - just Artemis packing a sad because TNZ beat them in LV Cup

[sb9]

Rob Campbell joining the Board as Chairman is actually one good reason to buy - his track record at THL, Precinct and Summerset is absolutely superb.

Any sell down of this size usually involves the one seller needing to discount down to a level where other sizeable buyers will find attractive to 'help' relieve the seller.

Bought a small parcel last week for medium term hold, purely on basis of Rob Campbell being the new Chairman.

[Snoopy]

OK time to put a stake in the turf and pick a valuation for this.

I use the 'Mary Buffett' model of compounding reinvested retained earnings to value my shares. That involves an assessment of ROE which based on the Auckland assets alone is 27%. The problem is the ROE on the other assets is much less, around 8%, so what to do?

As a conservative assumption I have assumed the Auckland based New Zealand Convention Centre will not be built by SKC, but the existing Auckland assets will retain their cash generating ability demonstrated in rugby world cup year. The non Auckland assets I have assumed will earn 8% on apportioned equity.

Putting those figures into my model and using a ten year time projection and using a buy price of $3.80, I believe the annual return on SKC shares will average around 5.12% net or 7.4% gross. This assumes steady dividends reinvested in those overseas properties and a share price in ten years time in the mid four dollar region.

I guess that outlook will sound fairly boring to some. But I favour boring investments, the more boring the better.

I wrote the above in September 2012.

5.12% on $3.80 represents just over 19cps. Dividends have averaged about that. With a share price of $4.25 we are up 45c since this post, and if anything maybe we are getting a little ahead of ourselves. So all looks on track, although my conservative assumption of SKC not building the Convention Centre was wrong. At any rate we are well overdue for an updated good look at SKC.

SNOOPY

[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

[Snoopy]

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

[Snoopy]

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

[Snoopy]

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

[Snoopy]

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