As reported by: Sunday Star Times
Large investors worry the casino operator isn't making a big enough splash across the Tasman, writes Garry Sheeran.

Some of the country's largest and most successful institutional investors are giving Sky City a hard time about its decision to buy the Darwin casino.

They are also getting "stuck into" the sharemarket darling about the poor performance of another Australian investment, the Adelaide casino.

They fear hard-earned dollars from a hugely successful Kiwi business enterprise may be tipped down black Aussie holes.

Tough talk came as Sky City executives met institutions following last month's announcement of the company's latest profit result and details of the Darwin casino purchase.

First-half tax-paid profit was up 7 per cent to $55.1 million. Sky City will pay $220m for its Darwin purchase from US-based MGM Mirage.

Initial reaction was muted, with the share price remaining largely unchanged at $4.60. But as the fine print was pored over, what has been described as an "almost universal negative reaction" towards the Darwin purchase emerged.

Sky City's share price closed on Friday at $4.45.

Speaking from Adelaide, where he has been for the past week, Sky City chief executive Evan Davies agreed initial reaction to the Darwin purchase had been muted.

"I would say things are more positive now, but perhaps I am hearing different things in Australia where the Northern Territory is seen as an exciting place for development," he said.

But some Australian analysts are also less than enthusiastic about the Darwin purchase. They say Sky City is paying near top dollars for a casino which offers limited opportunities to reap synergy benefits and few growth prospects.

The Darwin purchase was a disappointing addition to Sky City's acknowledged quality casino portfolio, said one.

One Australian analyst was reportedly "underwhelmed" by Davies' statement that it would be "Obusiness as usual' for the Darwin casino in the foreseeable future."

Market sources suggested the Sky City meetings with institutions were a response to the negative feedback.

But Davies told the Sunday Star-Times they were normal procedure for Sky City following the release of results.

New Zealand investors "seem to have a terror of New Zealand corporate involvement in Australia and focus on circumstances in which problems occur," said Davies. "We need to put the performance of the Adelaide casino in context."

Results from Adelaide for the latest half year were flat. One analyst last week calculated the casino's operating profit represented a 7 per cent return on Sky City's $225m Adelaide investment. After nearly four years, the casino's rate of return should be double that to earn the company's cost of capital, he said.

"Now they are talking of spending another $70m on development, so are they telling us they can earn $30m on a total $300m Kiwi investment in Adelaide?" asked an institutional source.

Davies said the Adelaide casino was making money: "It may not be making as much as we'd like, but we have plans to further develop it."

Davies said it was easier to create value in a business for which licences were won in a competitive process, a casino was built and the doors opened. "Buying established casinos is a different proposition and Adelaide, like Auckland, will require a lot more hard work," he said. "But I am confident it, and Darwin, will become worthwhile investments for Sky City Entertainment as a group."

Sky City part justified its Darwin purchase by arguing it needed to diversify its earnings and revenue away from New Zealand where, say, a change in gaming regulations might threaten profitability.

After the Darwin purchase about 29 per cent of group revenues will come from Australia.

"That is a valid argument, but they must justify such investments by getting a return that is higher than the cost of capital," said another institutional source. That was proving a problem in Adelaide, and it was an open question whether they could achieve it in Darwin, he said.

One institutional source said his organisation was concerned about the Darwin project but would give the company the benefit of the doubt. It would look closely at Sky City's moves to improve performance and enhance value at Darwin.

Other institutions were not so generous, with one indicating it would look closely at the number of Sky City shares it held.