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SKYCITY is celebrating its 10th year of operation by continuing to grow and expand its entertainment business and deliver strong returns to shareholders. I am pleased to report a continuing high level of commitment by directors, management and staff to business objectives, best practice corporate governance, and compliance with regulatory requirements.
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SKYCITY has entered its second decade as a truly trans-Tasman leisure and entertainment business, with over $1.7 billion in assets spanning tourism, cinema complexes, hotel and convention centres, bars, restaurants, casinos and entertainment facilities.
2005/06 Result
Net tax-paid profit of $120.1 million represents a 13% increase over the prior year. As a consequence, our shareholders have enjoyed an increased distribution of 26 cents per share (tax-effective), compared to 24 cents last year.
SKYCITYs 2005/06 result reflects increased earnings across all of the Groups major business units. Auckland, Adelaide, Darwin and Hamilton all reported ahead of 2004/05, with only SKYCITY Leisure and SKYCITY Queenstown reporting reduced earnings. New cinema facilities are expected to enhance the earnings performance of SKYCITY Leisure and we note that Queenstowns 2005/06 result was adversely impacted by lower than anticipated returns from the international sector.
This was the first full year of revenues and earnings from key new facilities, including the five-star SKYCITY Grand Hotel and new VIP gaming rooms in Auckland, and new gaming and food and beverage facilities at SKYCITY Adelaide.
New Projects
Our focus at SKYCITY is to maintain investment and reinvestment in facilities to meet and exceed the expectations of our customers and to ensure that the companys revenue growth momentum continues strongly into the future.
We have announced a $40 million renovation of the main gaming floor at SKYCITY Auckland, to be implemented over the next 18 months. Implementing a complete remodelling of the main floor while, at the same time, minimising impact on customers, will be a challenging task. However, the extensive experience of our architects, engineers, construction and fit-out contractors and project managers in 24/7 projects will ensure the renovation work is completed with minimum disruption. We are confident our customers will be delighted by the new experience
that will result from this project.
Based on the success of the first stage of the SKYCITY Adelaide redevelopment, we are looking to move forward with the next stages of this exciting A$75-A$80 million makeover of our Adelaide property and anticipate final completion of all components by June 2009.
At SKYCITY Darwin, new facilities are planned over the next three to four years to encourage additional visitation and spend, and to capitalise on the growth momentum inherent in that region.
In our cinema business, four new complexes totalling 26 screens are planned to be completed and operating by the end of the 2007 calendar year.
Returns to Shareholders
SKYCITYs final distribution of 14 cents per share (interim distribution 12 cents per share) for the 2005/06 year will be paid on 6 October 2006. The full year payment of 26 cents per share represents an increase of 2 cents per share over last year and continues the companys practice of returning 90% of after-tax profit to shareholders.
During 2005/06, SKYCITY introduced a bonus share distribution of profits structure that has been well received by shareholders. We anticipate this bonus share structure will continue for future distributions.
Improving shareholder value is a primary objective for any company and we have been pleased to report strong returns for SKYCITYs shareholders over the last 10 years.
A shareholder who purchased shares on SKYCITYs first day as a listed company in February 1996, at an effective price of NZ$1.60 (after two share splits in 2001 and 2003), has more than tripled their original investment. In addition, they have received more than their original investment back as dividends and distributions over that 10-year period.
In the 14-month period from July 2005 to September 2006, SKYCITY shareholders have enjoyed a gross return of 25%, which compares more than favourably with the NZSX50 Gross Index of 8% over the same period.
Because SKYCITY has a high proportion of cash-based earnings and has been able to finance its capital requirements for maintenance and expansion from its own cash flows and borrowings, shareholders have been able to enjoy both strong value enhancement and a high level of profit distribution. Shareholders can be confident that the momentum of these earnings and distribution flows will continue into the future.
The directors are pleased to note that a significant number of our employees also own a share of their company, with more than 800 staff holding SKYCITY shares. SKYCITYs cash and equity-based incentive remuneration structure for salaried personnel is designed to encourage employee ownership and this staff shareholding level shows the scheme is delivering well in terms of this objective.
Key Strategic Objectives
SKYCITYs key strategic objectives are to grow shareholder value, enhance and expand the business, and deliver strong earnings performance. Central to meeting these objectives is compliance with gaming regulatory requirements, a proactive approach to host responsibility issues, and active community participation in each of our geographic locations.
The directors, on behalf of shareholders, acknowledge the commitment of management and staff to achieving the companys key strategic objectives.
Corporate Governance Best Practice
SKYCITY is fully committed to corporate governance best practice as prescribed by the NZX and ASX principles, recommendations and guidelines. Our governance framework is outlined in detail in this annual report at pages 40-50 of the annual report.
The SKYCITY board formally reviews, on an annual basis, the companys governing charter documents, code of best practice, and treasury, delegated authorities, securities trading and other policies. The directors also review the performance and effectiveness of the board and its committees. We confirm that these formal reviews have been undertaken during the 2005/06 period.
The directors are satisfied that they provide the right mix of skills and experience at the board table. The board is also confident that the information provided by management is to the standard required for effective consideration of issues and for decision-making.
SKYCITY confirms its compliance with gaming rules and procedures, liquor licensing requirements and the monitoring of financial transactions. The companys extensive risk management programme, covering all Group operations, is monitored continuously and is formally reviewed by the Audit and Risk Committee on an annual basis.
The board is satisfied that the internal control environment within the business is robust and effective and that the companys internal audit processes and procedures are effective in identifying issues and initiating remedial actions as and when required.
SKYCITY is committed to providing a significant level of detail when reporting on the operational and financial performance trends within the business. We communicate with external parties as effectively as we are able to, within the strict requirements that govern public company disclosure. The feedback we receive tells us this interaction and involvement with the investment community at both institutional and retail shareholder level is highly valued. We were pleased to host a visit to SKYCITY Auckland by the New Zealand Shareholders Association in June 2006 and look forward to further contact and liaison with the NZSA.
Regulatory Environment
There has, in recent months, been significant focus and some concern from both the local and international investment communities on the regulatory intervention that has adversely affected the value of a number of New Zealand-listed companies. We note that SKYCITYs regulatory interaction is in a different context to the circumstances that have affected other companies. Their issues have related to competitive access and/or product pricing rather than the social issues associated with host responsibility and harm minimisation, which are the key areas of focus for regulators in our geographical jurisdictions.
SKYCITY shares the same host responsibility and harm minimisation intentions that are reflected in the gaming legislation in New Zealand, South Australia and the Northern Territory. We are fully aligned with these objectives and can fairly claim we have been operating in advance of the legislative requirement since we commenced operations in 1996. We anticipate debate and discussion about how best to achieve the overriding objectives for host responsibility and harm minimisation. However, at the end of the consultative processes that will be initiated, we expect there to be little disagreement as to overall approach and purpose.
We are pleased to report our regulatory and government relationships are on a sound footing in each of our jurisdictions.
Board of Directors
Audit and Risk Committee
On behalf of the board, I wish to thank Sir Dryden Spring for his chairmanship of the Audit and Risk Committee over the last two and a half year period, and to welcome Rob McLeod as the new chairman of this committee as from 1 October 2006.
Acknowledgement
The governance environment for listed companies is imposing increasing demands on boards of directors, and its committees undertake much of the detailed work on behalf of the board. I wish to acknowledge the quality of the work undertaken by directors in respect of both their board and committee roles.
Director Re-election
Elmar Toime and Sir Dryden Spring retire by rotation at this years annual meeting and have offered themselves for re-election. SKYCITYs board charter requires that, where a director has completed two terms in office since first being appointed by shareholders, they must be formally invited by the board to stand again for re-election. At its August meeting, the board unanimously invited Mr Toime to stand for re-election. Sir Dryden has completed one term since first elected by shareholders at the 2004 annual meeting. The directors confirm that Elmar Toime and Sir Dryden Spring continue to contribute effectively to the direction of the company and the stewardship of its affairs and that they are fully supportive of both directors standing for re-election at the companys annual meeting in October.
Accounting and Reporting
The 2005/06 year is the first that SKYCITY has reported under the new international financial reporting standards (NZ IFRS). SKYCITY is one of the first New Zealand companies to report under NZ IFRS and presentation of our financial results in the new format has gone very smoothly.
As referred earlier, in the corporate governance section of this review, SKYCITY is recognised within the investment and financial communities as a leader in performance disclosure and we are fully committed to maintaining this position.
Annual Meeting
The directors look forward to meeting shareholders at the companys annual meeting to be held at the SKYCITY Auckland Convention Centre on 27 October 2006.
Rod McGeoch
CHAIRMAN
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