SkyCity return put at 12pc on centre deal
SkyCity Entertainment Group could gain a return of about 12 per cent from the $402 million it will spend to build Auckland's international convention centre under the deal it struck with the Government.
The listed Auckland casino group will bear the total cost of building the 3500-capacity convention centre next to its existing premises in central Auckland, in return for considerable gambling concessions.
A report by consultants KordaMentha estimates the benefits to SkyCity from the additional gaming facilities and an extension of its casino licence to 2048 will more than cover the development cost.
It says an expected "hurdle rate" - or minimal acceptable rate of return - of 12 per cent is "broadly reasonable".
However, some underlying assumptions were uncertain and subjective, it added.
SkyCity has been granted an additional 230 pokie machines, 40 extra gambling tables and another 12 tables which can be swapped for automated tables. In addition 17 per cent of its machines will be able to accept banknotes greater than $20, and cashless gaming will be allowed.
Analysts say the number of extra machines awarded is fewer than they had expected but the number of gambling tables is greater.
Morningstar analyst Nachi Moghe said the predicted return was "not bad".
However he said that SkyCity would spend $900m in the next three to four years, including developing Adelaide's casino precinct.
Craigs Investment Partners head of research Mark Lister said investors would want to see a reasonable return on the $402m SkyCity was putting into a convention centre.
"You wouldn't want to see it too much lower than 12 per cent," he said.
The company had a strong balance sheet and could support the growth, and was not expected to need to raise any extra money.
"If people thought that was going to happen, we wouldn't see the share price up around $4.50."
A Korda Mentha report concluded the net present value of the deal to SkyCity would range between $56m and $62m once capital costs including tax depreciation is taken into account.
Conventions and Incentives New Zealand (Cinz) chief executive Alan Trotter predicted the convention centre could attract 75 to 100 events a year, varying in size from 350 people to 3500 people. The centre could hold three events of 1000 people at the same time.
It would attract meetings of international associations, many of which had been to Australia and would not go back there in the near future.
"There's a lot of pent-up demand . . . We just haven't been able to fish in that pond."
The deal was a good one for SkyCity, particularly the extension of its casino licence which also kept competitors out of Auckland until 2048, he said.
"How many businesses can have a 35-year guarantee of no competition?"
Cinz was meeting with Tourism New Zealand this week to discuss how the government investment of $34m over four years to attract large scale events and conferences to this country, which was a pre-Budget announcement a few weeks ago, would be spent.
Air New Zealand welcomed the deal, saying this country had small volumes of business traffic and the conventions market was important.
SkyCity's shares closed yesterday up 10 cents at $4.50.
The Dominion Post