SKC - Sky City

[bull....]

Mining boom over , darwin was always going to struggle

[winner69]

Spending heaps more in Adelaide

All this spending never seems to create any long term value - one reason why I can never bring myself to 'invest' in them

Has to be a compelling buy so I can shut my eyes and pretend its not a sin stock

[Balance]

At least its non cash .....yes, we'll forgive for either paying far too much for Darwin in years gone by or failing to make it work

https://nzx.com/files/attachments/262233.pdf

(Snoops ...improves ROE next year for your analysis)

The golden days of the BIL stooge and wannabe, Evan Davies, eh W69?

Golden days for the boys in the investment b**king world, especially CSFB and FNZC, advising Evan Davies and the old boys' Board of Directors to make acquisitions one after another - mega fees but mega looses for Sky City.

Golden days when SKC's balance sheet was leveraged to the hilt to acquire any manner of assets, Force Corp, CanBet, Adelaide, Darwin etc, until Auckland casino itself was ran down to such an extent that dealers had to wear flea collars on their legs to ward off fleas!

[Balance]

Spending heaps more in Adelaide

All this spending never seems to create any long term value - one reason why I can never bring myself to 'invest' in them

Has to be a compelling buy so I can shut my eyes and pretend its not a sin stock

I actually like the expansion of Adelaide casino myself - looks a very comprehensive upgrade to me and entrench Sky City as the premier city entertainment destination in this city of around Auckland size.

Better deal certainly than when Sky City first bought in and ended up with the Adelaide City Council stifling every expansion and upgrade plan - need to preserve the crumbling landmark heritage building, see?

[Snoopy]

I actually like the expansion of Adelaide casino myself - looks a very comprehensive upgrade to me and entrench Sky City as the premier city entertainment destination in this city of around Auckland size.

Better deal certainly than when Sky City first bought in and ended up with the Adelaide City Council stifling every expansion and upgrade plan - need to preserve the crumbling landmark heritage building, see?

A few years ago I was lucky enough top be able to spend a bit of time in Asia, (including Macau for a day) and also managed to look in on the Casinos in Melbourne and Sydney. Have called in on the way through Hamilton one day, and had a meal in the Hamilton Casino. Seemed OK for atmosphere. OK, I am not a gambler in the chip and card sense. But I really felt the 'feel' inside the Sky City Darwin and Adelaide casinos in particular were light years ahead of any of the others. I guess the 'crumbling heritage' of Adelaide was part of the appeal there. I haven't been into the Auckland casino for many years, and I know it has been refurbished since my visit. I didn't particularly like the feel inside Sky City Auckland at the time, but then I don't particularly like the feel of Auckland in general. So I may not be the best judge of where SKC is in Auckland today.

I am a bit worried this car park thing in Adelaide is a perpetual excuse for non-performance.

After a few good investment years in SKC, I was looking for a 'partner' investment in the casino industry to add to my portfolio. I didn't like what I saw in the alternative 'investments'. So my investment in SKC still sits 'out on it's own'. I am still reasonably happy with my SKC investment. I paid an average of $3.03 for my shares, with most of those being bought many years ago. I convinced myself back in 2016 that topping up at rights issue time at $4.40 was a good idea, because as a 'rule of thumb', topping up at rights issue time is a good idea. Maybe not one of my better 'top ups'!

I was aware that the payment of imputation credits has been 'up and down'. But it is only in the last week that I have been through my records and seen how irregular the imputation credit adjustment was. There ends my impression of the current state of SKC.

SNOOPY

[Snoopy]

At least its non cash .....yes, we'll forgive for either paying far too much for Darwin in years gone by or failing to make it work

From the press release:

"The proposal to write-off Darwin's goodwill is primarily attributable to increased competitive pressures in the gaming machine business. This stems from the unforeseen policy decision in December 2014 by the previous Northern Territory Government to remove the cap on gaming machines in the Territory. Since the implementation of that policy in July 2015 there has been a 75% increase in the number of gaming machines in Darwin (outside of the casino). This significant increase in competing gaming machines in the catchment area of the casino has consequently had an increasingly adverse impact on
revenue and earnings at SKYCITY Darwin since the beginning of 2016."

The casino in Darwin was bought in 2004. You could hardly expect Sky City casino management to know what was going to happen to Territory policy on gaming machines ten years later. I think your criticism of "paying too much for Darwin" is unfair. Darwin actually went quite well for twelve years.

(Snoops ...improves ROE next year for your analysis)

At least you recognize the write down is non-cash. It follows that lesser known accounting rule of any money spent over ten years ago being beyond 'current institutional memory' and so the spending was not real. I like to think of the write down as more like a 'spin of the wheel' going a little bit wrong ;-P

SNOOPY

[Snoopy]

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 an Australian perspective. 'From an Australian perspective' means that the investor concerned can take advantage of Australian franking credits. Despite being from an Australian perspective, I have expressed all dollar values in NZ dollars to facilitate easier comparison with the NZ perspective case.

Payment Date	Dividend Franking Percentage	Declared Dividend	Gross Dividend (F/C adjusted)
17-03-2017	0%	10.0cps	10.0cps
16-09-2016	0%	10.5cps	10.5cps
16-03-2016	0%	10.5cps	10.5cps
02-10-2015	0%	10.0cps	10.0cps
02-04-2015	25%	10.0cps	11.07cps
03-10-2014	0%	10.0cps	10.0cps
04-04-2014	100%	10.0cps	14.29cps
04-10-2013	0%	10.0cps	10.0ps
05-04-2013	50%	10.0cps	12.14cps
05-10-2012	60%	8.0cps	10.06cps
Five Year Average		19.8cps	21.71cps

Assuming a required rate of return of 6.25%, this translates to a share price of:

$0.2171 / 0.0625 = $3.47

(Note that I have reduced the acceptable return to 6.25% -Aus perspective - from 6.5% (NZ Perspective). This takes into account the reserve bank cash rate being 1.5% in Australia, 0.25% less than the 1.75% in New Zealand.)

This is quite an interesting result, because it shows the value of SKC to the NZ or Aus dividend hound is more or less the same!

SNOOPY

[Snoopy]

This is quite an interesting result, because it shows the value of SKC to the NZ or Aus dividend hound is more or less the same!

Now that we have considered dividends from both the NZ and Oz perspective, it is time to combine the two.

A bit of background: Imputation Credits are an NZ Market creation to ensure that shareholders, the owners of the company, only pay tax on their share of company income once. An 'imputed dividend' means that an NZ shareholder can take credit for any company paid tax that the company in which they own shares has already paid on their behalf. An 'unimputed dividend' means the company has not paid tax on that dividend. So it is up to the shareholder to pay the tax on their 'dividend income' themselves.

There is an exactly analogous system operation in the Australian market called 'Franking Credits'. However, the NZ Inland Revenue does not recognize Australian franking credits and vica versa. This poses a bit of a dilemma for companies that operate with scale on both sides of the Tasman. They have to balance the interests of both NZ investors and Australian investors by doing some 'mixing and matching' as to where they declare their profits. By 'mixing and matching' I am referring to the the practice of transfer pricing. The location of some company costs are optional. And where the company chooses to incur these costs influences the relative profitability on each side of the Tasman.

One reflection of where a company allocates their costs can be seen in whether dividends are either 'imputed' or 'franked'. Income is never franked and imputed, because that would mean paying tax on the same income twice in both countries and no responsible management would allow that to happen. So the balance between franked and imputed income, as reflected through dividends paid from that income, is of interest to shareholders. The amount of imputing or franking for each dividend declared over the last five years I have listed in the table below.

Payment Date	Dividend Imputation Percentage	Dividend Franked Percentage	Imputed + Franked Percentage
05-10-2012	60%	60%	120%
05-04-2013	50%	50%	100%
04-10-2013	100%	0%	100%
04-04-2014	0%	100%	100%
03-10-2014	100%	0%	100%
02-04-2015	0%	25%	25%
02-10-2015	33%	0%	33%
16-03-2016	0%	0%	0%
16-09-2016	50%	0%	50%
17-03-2017	0%	0%	0%

A couple of 'discussion points' arise from this table.

SNOOPY

[Snoopy]

Payment Date	Dividend Imputation Percentage	Dividend Franked Percentage	Imputed + Franked Percentage
05-10-2012	60%	60%	120%

A couple of 'discussion points' arise from this table.

How is it possible to pay out 'credits' that amount to more than 100% of dividend income, as per the dividend declared on 05-10-2012? We have to remember that a company earns imputation credits on all of its income. If a company does not pay out all of their income as dividends, then imputation credits (and I presume franking credits), can accumulate inside the company. So it is likely this 'over payment of credits' was accomplished by using imputation stockpiled from previous years or even the current year (assuming 100% of earning were not paid out of dividends in the current period).

The other way a company can pay out imputation (and franking?) credits that they have not earned is to pay some income tax coming due in advance.

I am not sure which explanation applies here. But paying out more than 100% of income credits available on income is not as inexplicable as it seems at a casual glance.

SNOOPY

[Snoopy]

Payment Date	Dividend Imputation Percentage	Dividend Franked Percentage	Imputed + Franked Percentage
17-03-2017	0%	0%	0%
16-09-2016	50%	0%	50%
16-03-2016	0%	0%	0%
02-10-2015	33%	0%	33%

A couple of 'discussion points' arise from this table.

	Prima Facie Income tax @ 28%	Actual Legal Income Tax Expense	Cashflow Statement Tax paid	Imputation Credits Paid: D1/D2
FY2016	$55.235m	$51.597m	$13.062m	33%/0%
FY2015	$47.840m	$42.114m	$29.059m	100%/0%

The 'actual legal income tax expense' is less than the 28% corporate rate, because certain expenses are not tax deductable.

'D1' refers to the first dividend paid in the financial year under scrutiny (actually the 'final dividend' from the previous year).
'D2' refers to the second dividend paid in the financial year under scrutiny (actually the 'interim dividend' for the current financial year).

For both FY2015: $29.059m / $47.840m = 61% and
FY2016: $13.062m / $55.235m = 24%

the actual cash paid over both FY2015 and FY2016 shows not enough tax credits have been paid during the year to pay, in combination at least, a fully imputed and/or a fully franked dividend over FY2016. (remember dividend policy is to pay out on only 80% of earnings).

Yet if we look at the actual dividends paid over FY2016, there were just 33% (higher than the 24% actually paid) dividend imputation credits or franking credits paid on the first dividend of that financial year (02-10-2015), and no imputation or franking credits paid at all on the second dividend paid on 16-03-2016.

Something very unusual is going on here.

So we are left with a real mystery. Why has a supposedly amply capitalised SKC, not handed over the cash to the respective Australian and New Zealand tax departments, certainly enough tax paid to 100% impute/frank those dividends declared over FY2016?

SNOOPY