2015 Autumn Group Assignment Part One

Business Valuation and Financial

Analysis 22743
SkyCity Entertainment Group Limited

Sourcehttp://calvinayre.com/2013/08/19/casino/skycity-eyes-manila-forpossible-casino-expansion

2015 Autumn Group Assignment Part One

CONTENT
Executive Summary.......................................................................3
SKC: Business, Macroeconomic and Industry Analysis......................4
1.0 Macro Economic Factors And Its Influence On The Performance Of
Sky City........................................................................................ 4
1.1 Gross Domestic Product Performance Forecast for 5 Years................4
1.2 Interest Rates and Consumer Price Index (CPI) Forecast for 5-7 Years
........................................................................................................... 4
1.3 Inflation Rates Forecast For 5-7 Years..............................................5
1.4 The Impact of Macroeconomic Factors on companys Performance....5

2.0 Industry Analysis.....................................................................5

2.1
2.2
2.3
2.4
2.5

Rivalry amongst Existing Firms - Low...............................................5

Threat of New Entrance to the Market - Low.....................................6
Threat of Substitutes - Low.............................................................6
Bargaining Power of Customers Casino Low, Hotel High.................6
Bargaining Power of Suppliers - Low................................................6

3.0 SKC Business Strategy.............................................................7

3.1 Provision Of High Quality Service....................................................7
3.2 SKC Market Positioning...................................................................7
3.3 Adhere To Regulations of Performing Business.................................7

4.0 Risks Attributed to Business Performance.................................7

4.1 Company Performance....................................................................7

5.0 Sustainability of Profits...........................................................8

References...................................................................................9
Appendix 1.................................................................................10
Appendix 2.................................................................................11
Appendix 3.................................................................................12
Appendix 4.................................................................................13

2015 Autumn Group Assignment Part One

Executive Summary
The underlying influence of the macroeconomics factors has helped determine the firms
immediate position in terms of operation. The macroeconomic factors in both Australia and New
Zealand, where the company operates, prove to be favourable to steer future success and growth.
By use of the Porters Five model, the paper has established that industry upon which the
company operates is portrayed by weak competition in casino business, which is a plus in regards
to competitive advantage and higher levels of revenues. The hotel industry, however; experiences
high competition due to the easement of entry into this market by smaller businesses. In fact,
most of the firms revenues emanates from gaming as opposed to business unit. However, in an
effort to shield its future profits and growth, SKC has engaged in a multiple level of activities that
include; partnering with Auckland Council to open a gaming street and the launching of new
loyalty program aimed at sustaining future customer base.

2015 Autumn Group Assignment Part One

SKC: Business, Macroeconomic and

Industry Analysis
1.0 Macro-Economic Factors And Its
Influence On The Performance Of
Sky City
The process of evaluating the companys immediate macroeconomic environment is
complex in nature. The next section of this paper puts up a discussion on these factors as they
affect its performance.

1.1 Gross Domestic Product Performance Forecast

for 5 Years
The level of Australia gross domestic product has been on the increase for the past 5
years. Although there has been a slight decrease in the current financial years, still they remain
favourable in comparison to global indices. The recent developments in technological
advancements and mining sectors, as well as an increase in the trading of these items within the
securities markets, postulate a positive future growth. Statistically, in December of 2014,
Australia GDP grew by about 0.4% reflecting a 2.3% percentage change (Australian Bureau of
Statistics, 2015). The GDP is expected to even grow further in this current financial year.
Appendix 1 shows the growth in Australias GDP over the past 5 years or so. Notwithstanding,
according to Statistics of New Zealand (2015), the 2014 GDP grew slightly by 1%. Its economy
is also expected to improve due to economic activities, as well as primary industries (Appendix
2).

1.2 Interest Rates and Consumer Price Index (CPI)

Forecast for 5-7 Years
Australias current interest rates depict a favourable downward trend. This is a positive
indication that there is going to be increased economic activities especially in the financial
sectors. CPI remains relatively lower than 4.20 per cent in 2014. This can be clearly seen in
Appendix 3. New Zealands interest rates for the fourth quarter of 2014 remained unchanged at
3.5%. The countrys future with its trading partners is set to improve tremendously in 2015. It is
important to note that for both of these countries the economy is set to increase primarily because
of the recent lowering of oil prices. As a result of relatively lower oil prices, the purchasing

2015 Autumn Group Assignment Part One

power of all households within these two economies is set to increase hence a guarantee on the
improved income disposal. There are also high expectations of future profits since the cost of
doing business will reduce significantly due to low manufacturing costs.

1.3 Inflation Rates Forecast For 5-7 Years

As opposed to what was early anticipated, the inflation rates in Australia have continued
to reduce with the fourth quarter of 2014 recording a 1.7% decrease. The decline in inflation is
highly attributed to the plunged global oil prices. Likewise, the increase posted in New Zealand
government statistics indicates a satisfactory decrease within the five-year period to a figure
below 1.5% in fourth quarter 2014. The reduction in inflation is ascertained to current reduced oil
prices in the global market, which has facilitated a reduced cost of conducting business
operations and reduced costs for basic needs.

1.4 The Impact of Macroeconomic Factors on

companys Performance
As it can be noted from the figure above, there is a certainty of current and future profits
because of the relatively stable gross domestic product, inflation rates and interest rates. This is
highly attributed to the reduction in costs of doing business within these economies. Despite the
improvements in the numerous macroeconomic factors postulated above, the consolidated annual
statements indicate an insignificant decrease in the revenues from $859,549M in 2013 to
$820,483M in 2014.
Equally important, it is crucial to note that the expected future revenues will increase
significantly since the plunge in oil prices occurred towards the end of the 2014 fourth quarter.
There is a prospect for a brighter future for the company because of the possible increased
income disposal and reduced costs of conducting business. However, this will depend on whether
Australia will manage to uphold positive macroeconomic factors in the coming 5 to 7 years of
operations.

2.0 Industry Analysis

In this section, the paper utilizes the Porters Five Factors to evaluate the casino and hotel
industry as well as establish the exact level of the present competition.

2.1 Rivalry amongst Existing Firms - Low

Casino industry postulates a low level of rivalry. It should be noted that the Australian and
New Zealand casino industry has continued to develop significantly. However, the fees imposed
on customers in both countries fail to attract them hence a firm might find it hard to enter the
market as exit strategies are expensive. The hotel industry however: indicates a high level of
competition. In fact, the intense level of competition might best expound on the reduced
revenues.

2015 Autumn Group Assignment Part One

2.2 Threat of New Entrance to the Market - Low

The threat to casino market is small because the business highly depends on the existing
economies scale to survive low revenues. It is crucial to note that a larger competitors always
enjoy cost advantages over others hence they are more profitable in nature. In fact, this is the
main reason potential entrants into the market suffer due to the absence of cost advantage on their
side. In essence, the first mover advantage rests with local casinos that enjoy localised monopoly
over others. For instance, Ski City Auckland and Adelaide enjoy monopoly in these regions as
they hold the sole license for operations.
The threat is also low in the hotel industry because customers already have hotels of their
choice hence limiting further entry of new ones. The industry also operates on an economics of
scale model so that the first movers in the industry enjoy the benefits of favourable locations. SKI
City is a first mover in this industry because it managed to enter the Casino business thus enjoys
a superior brand recognition and customer loyalty. For instance, the firm is popular in both
Australia and New Zealand in terms of quality casino service provision.

2.3 Threat of Substitutes - Low

Both hotels and casinos are not exposed to any form of substitutes because of the
uniqueness of services offered. For example, in the casino industry, it is difficult to ascertain a
substitute for gambling as a kind of entertainment. Therefore, there are no forms of threat for
substitution of entertainment. Subsequently, domestic gamblers always enjoy spending their time
in local casinos. For hotel industry, on the other hand, the level of quality services determines the
possibility of substitutes. Hence, they engage in intensive processes to ensure that services remain
at a top notch level at all times.

2.4 Bargaining Power of Customers Casino Low,

Hotel High
For casino business, it is relatively low for SKC customers. This is partly affected by the
low number of casinos as well as price inflexibility hurdle. The power remains relatively less
despite the fact that there are numerous differentiations of gambling sports. The limitation,
however; arises with the fact that these distinctions occur in different sections and regions so that
the decision to visit them is limited.
For the hotel, however, the bargain is high because of diversity of customers. Customers
that book more rooms can negotiate for fair prices. A perfect example rests with tour operators
who have the capacity to book for more space given that they enjoy direct access to potential
customers. In the event, that hotels fail to meet the underlying demand for their clients then their
respective bargaining power can be weakened all the same.

2.5 Bargaining Power of Suppliers - Low

For casino business, the bargain is considered to be low due to relatively reduced
switching costs. It is also low due to SKCs dominance in the market. For hotel industry, however

2015 Autumn Group Assignment Part One

the bargain is considered higher. This is significantly attributed to monopolization of suppliers in
regards to electricity and gas.

3.0 SKC Business Strategy

The company main objective is to ensure maximisation of profits and minimisation of
possible costs. The company can employ the following elements in order formulate and install its
strategic plans.

3.1 Provision Of High-Quality Service

This should be provided in the form of quality gaming and entertainment as well as hotel
facilities like food and accommodation for domestic and international customers.

3.2 SKC Market Positioning

Considering the fact that there has been substantial growth in entertainment and gaming
industry over the years, the firm should be able to expand its market needs and preferences in
order to maintain a stronger position.

3.3 Adhere To Regulations of Performing Business

The company should ensure that their activities in both casino and hotel industry operate
within the legal frameworks in both Australia and New Zealand. This is important to avoid
possible future fines and penalties, which can decrease revenues substantially.

4.0 Risks Attributed to Business

Performance
First, there is a possibility of fluctuations in the money markets. This might bring about
foreign exchange risks such that revenues will be either being appreciated or depreciated
depending on the stability of US dollar. Secondly, there is also a possibility of SKC to face
imminent liquidity risks attributed to the rather cash and cash equivalents in its balance sheet. In
the case of movements in the money markets, the firm might lose substantial amounts of money
due to depreciation or appreciation of the US dollar.

4.1 Company Performance

SKCs strategic level of the framework has been accomplishing significant levels of
results over the five-year period between 2009 and 2014. The firm has managed to secure and

2015 Autumn Group Assignment Part One

maintain a favourable position in the industry performance indices across the globe as well as
being the leading domestic gaming entity in Australia.

5.0 Sustainability of Profits

SKC is deemed to be the largest entertainment firm that operates casinos, VIP gaming
and hotel services in both Australian and New Zealand markets. It is a public traded company
whose shares are sold in two markets of operation.
The firms total revenues have decreased by about 4.5% in the period between 2013 and
2014 with the figures dropping from $859,549M to $820,483M respectively. The drop is
attributed to decreased income from gaming related services and products in FY2014 (Appendix
4). It is also attributed to increased expenses especially from restructuring costs, which increased
from $3,235M to $9,170M and depreciation and amortisation expense that increased from
$76,784M to $80,769M in 2013 and 2014 respectively.
Following the fact that Australia response to the effects of the global financial crisis has
been positive, it is expected that the firm will continue to post growth and favourable profits in
the future. In consequence, it can be argued that the increased brand marketing for the firm as a
luxury destination has continued to attract a great deal of gamers in both the domestic and
international markets as well.
Some of the notable efforts pursued by the company to guarantee sustained profits in the
future can be seen in the partnership it made with Auckland Council where a total of $10M was
invested in transforming a street into a gaming street. Subsequently, some of the reconstruction
costs were incurred in the renovation of Sky Towers in order to accommodate future demands.
Notably, as a way of enticing and retaining loyal customers, the firm recently launched the
Premier Rewards Initiative that aims to reward loyal customers hence ensuring future stabilised
customer base.

2015 Autumn Group Assignment Part One

References
Australia Bureau of Statistics. 2015. Australian National Accounts: National Income, Expenditure
and Product, Dec 2014: December Key Figures. Retrieved on March 11, 2015 from
http://www.abs.gov.au/ausstats/abs@.nsf/mf/5206.0
Sky City Annual Report. 2014. Retrieved on March 11, 2015 from
http://ir.skycityentertainmentgroup.com/phoenix.zhtml?c=162796&p=irolreportsAnnual2014

2015 Autumn Group Assignment Part One

Appendix 1

Source: Australian Bureau of Statistics, 2015

Graph 1 : GDP growth rates, Volume measures, quarterly change of Australia

10

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Appendix 2

Graph 2: The GDP and GDE value of Australia

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2015 Autumn Group Assignment Part One

Appendix 3
Australia
Prices

Last

Previous

Highest Lowest

Unit

Inflation
Rate

1.70

2.30

23.90

-1.30

Per cent [+]

Inflation
Rate
Mom

0.20

0.50

7.55

-1.54

Per cent [+]

106.40

106.60

4.20

Index
Points

2.11

7.60

0.87

Per cent [+]

106.50

107.10

43.40

Index
Points

[+]

Consumer
Price
Index CPI

106.60

Core
Inflation
Rate
Core
Consumer
Prices

2.10

107.10

[+]

GDP
Deflator

101.10

101.10

101.80

6.70

Index
Points

[+]

Producer
Prices

104.10

104.00

104.10

70.70

Index
Points

[+]

Producer
Prices
Change

1.10

1.20

6.30

-1.50

Per cent [+]

Export
Prices

85.30

85.30

112.20

16.30

Index
Points

[+]

Import
Prices

105.20

104.30

116.30

51.50

Index
Points

[+]

3.50

20.60

-3.20

Per cent [+]

Food
Inflation

2.00

Graph 3: The data of key performance indictor of Australia prices

12

2015 Autumn Group Assignment Part One

Appendix 4

Graph 4: Income statement of the Skycity Entertainment Group Limited for the year ended 30
June 2014

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