SkyCity Entertainment is grappling with capacity issues, as licensing regulations in New Zealand make expansion of its properties difficult.
The company this week reported its annual results, posting an almost 15 percent drop in reported profit and a slight increase in normalised profit. Management also presented investors with an update on the status of its projects and future plans.
New Zealand's only listed operator has three properties in its home country and one in Australia.
The company made a significant comment in relation to its position in Queenstown where it has recently acquired 1.01 hectares of prime development land on the edge of town.
SkyCity currently owns both casino licences in the town, but neither of the downtown sites is in premises the company regards as satisfactory and expansion on either site would be very difficult; hence the attraction of a whole new site.
However, there is a significant legal difficulty. SkyCity cannot get a new casino licence because there is a government-imposed freeze on the granting of licences and the current law does not allow licences to be transferred from one set of premises to another even within the same city.
This means that the only way SkyCity can operate its proposed new hotel with a casino is to persuade the government to amend the law to allow a transfer to take place.
CEO Graeme Stephens explained that the company will do a feasibility study of the project with the assumption built in that the hotel has a casino licence. And if the project is attractive, then it will seek regulatory approval to make this possible.
The company would talk to industry regulator, the Gambling Commission and the Minister of Internal Affairs about getting amending legislation put through Parliament.
If amendments were not possible, SkyCity would then look again at whether the hotel development was a sound investment in its own right. All of this will take time, perhaps several years.
The company also has another regulatory issue on its hands, but a solution looks more immediately achievable.
In Hamilton – a 170 000 person city south of Auckland in a prosperous farming area – the company’s casino is small and the present site is capacity constrained although SkyCity does own more land adjacent to its current casino.
Stephens said demand for gaming machines was greater than for gaming tables and particularly when the casino was busiest on Friday and Saturday nights it was unable to meet demand.
Gamblers were being turned away, and he thought they simply went to clubs and pubs or gambled online.
The company is seeking to surrender three tables in return for 60 more machines, on the basis that the total amount of gambling would likely not increase but would take place in SkyCity’s premises rather than elsewhere.
“Surely we are a better and safer place than other venues in the city,” he said.
Gambling legislation explicitly allows a tables for machines swap although SkyCity’s move was unprecedented and has never been sought in New Zealand before.
There has been strong opposition locally to any increase in the number of pokie machines or a greater concentration of machines regardless of ownership. Industry regulator, the Gambling Commission, is holding a public hearing on the company’s application in Hamilton in November.
Stephens noted that if the swap were allowed, it would encourage the company to develop a new hotel next door to the casino, which he said would be good for the city.
In Adelaide, the expansion was “on track, on time and on budget,” although the disruption from construction would continue through to the end of September 2020, and “we hope to be open fully for business again in October 2020.”
In Auckland, the opening of its $700 million International Convention Centre development has been pushed back a couple of months “towards the end of 2020”, and a dispute with the construction company Fletcher Building for nearly $40 million over delays and cost overruns is still to be resolved.
In terms of the annual results, Stephens said management was “happy with that.”
“We are now lower geared and focused on efficient capital allocation,” he told an analysts briefing.
The flat result was attributed to a challenging operating environment and a series of one off factors, including the sale of the Darwin casino during the year, settlement of a tax dispute in Australia, and adjustments to revenue to meet new accounting standards. “In total all the adjustments largely offset each other, CFO Rob Hamilton said.
Karl Williscroft of Craigs’ Investment Partners said the key takeout from the result was no material surprises, hence the muted reaction from the market.
“Most business units are broadly in line with expectations and growth in the key Auckland EGMs in the second half. Major projects in Auckland and Adelaide to be completed by the end of 2020. Some construction disruption in Adelaide noted," he said.
Otherwise he said most properties were trading in line with no surprises which was “a nice change.”
“Importantly the FY20 guidance is for some growth” in normalised EBITDA on a like for like basis. The company is expecting domestic and international economic environment to continue to be challenging with ongoing cost pressures.
“With a dividend yield of about 5 percent and also an on-market buyback we would expect the share price to be supported to an extent in this low interest rate environment."
The outlook for FY 2020 was more cautious than in the past; revenue and costs were both expected to increase
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