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SkyCity's big spending plans may not deliver enough to earnings, investors say

SkyCity Entertainment Group, which has earmarked $800 million to expand and upgrade its Auckland and Adelaide businesses by 2020, has yet to convince investors that it will be money well spent.

New Zealand's only listed casino company expects to outlay about $500 million on a 5-star hotel and convention centre in Auckland, and $300 million on the redevelopment of its Adelaide casino. In return, it has secured greater concessions on its casino operations from the government.

The company's shares gained 1 percent to $3.94 today and have advanced 8.9 percent the past 12 months, lagging behind a 20 gain in the benchmark NZX 50 Index index as investors weigh up whether the increased investment is going to flow through to earnings. In an attempt to soothe concerns about the extra spending, SkyCity has promised to maintain annual dividends of at least 20 cents a share. It announced a first-half dividend of 10 cents today as profit fell 11 percent to $54.6 million.

"The company has a huge capital expenditure programme ahead of them," said Andrew Bascand, who doesn't hold SkyCity shares among the $1.2 billion in equities he helps manage at Harbour Asset Management. "Short-term trading performance is really not the story for SkyCity, it's what investors make of the massive expenditure programme and the return that could happen on that expenditure programme.

"You work out what total return on equity they need to get out of that - they need to almost double their profits and it's quite hard to see that happening. A lot of things have to go right for that to occur so everyone is trying to assess the potential of them delivering on all those aspects," Bascand said.

SkyCity is in talks with New Zealand's government about help funding a cost blowout for its plans to develop the "landmark" convention centre in Auckland. While SkyCity originally agreed to fund the $402 million centre in return for gambling concessions, the estimated cost has now ballooned to between $470 million to $530 million. Finance Minister Bill English said today that using taxpayers funds for the convention centre was his "least preferred option."

Chief executive Nigel Morrison told a results presentation in Auckland today that he expects to enter into a construction contract in May or June of this year and receive a resource consent in the fourth quarter of the calendar year.

He said he is confident SkyCity can fund expansion through cash and debt facilities, although the company is also considering joint ventures or partnerships. He didn't provide further details and subsequently cancelled interviews with journalists.

The company may exceed its current A$350 million budget for Adelaide spending as it looks to expand its VIP offerings, he said. SkyCity could sell an Auckland carpark facility worth about $35 million to help fund its expansion plans, he said.

In the first half of its current financial year, SkyCity profit fell to $54.6 million, or 9.3 cents per share, from $61.1 million, or 10.4 cents, the year earlier as earnings at Adelaide fell, while the performance of its flagship Auckland business improved, the company said. Revenue rose 6.6 percent to $450.7 million.

SkyCity shares are rated an average 'hold', according to analysts polled by Reuters.