Sky City
Valuecruncher has valued each Sky City share at $5.10, with a range of $4.13 to $6.13. The share price closed at $4.85 on the 28th of February down 23 cents following the announcement of the interim results for the 6 months to December 31.
Revenue Growth
Revenue growth is forecast to decline steadily at 9%, 7% and 5% for 2006/07, 2007/08 and 2008/09 respectively, converging to the terminal growth rate of 3%. The declining revenue growth projections reflect the limited opportunities Sky City has to expand gaming operations in New Zealand.
EBIT Margins
Sky City’s result for the 6 months to December 31 revealed an after tax profit of $45 million down 23.2% on the same period a year ago. A key contributor to the lower profit was adverse VIP/commission outcomes (theoretical returns on revenue gambled) for the period. Expected profit margins are based on achieving the theoretical returns on revenue gambled, in the long run these theoretical predictions hold but in the short term returns can be volatile. The adverse VIP/commission outcomes for the 6 months to 31 December are incorporated in the forecast EBIT margin of 29% for the 2006/07 year. A conservative EBIT margin of 32.0% is forecast from 2007/08 onwards based historic levels.
Discount Rate (WACC)
The WACC used for this analysis is 10%.
Terminal Growth
Terminal growth has been set at 3%.