Shares in SKYCITY Entertainment Group Limited (ASX: SKC) jumped 7.2% today after the business revealed a buoyant set of results for the first half of financial year 2016.
The stock may be the most significant mover across the S&P/ASX 200 (Index: ^AJXO) (ASX: XJO) today as its strong results provide more evidence that the tourism sector in general is enjoying a substantial uplift.
This is a New Zealand focused business, with SkyCity's main earnings generator being the SkyCity casino, hotel and hospitality complex in downtown Auckland.
This asset has reportedly performed strongly in the six months ending December 2015, with more heavy investment ongoing in developing one of Auckland's main tourist attractions.
The international businesses that include the Adelaide casino have also posted strong turnover growth, while cost savings and lower funding costs also contributed to the reportedly strong first half of the financial year.
As a consequence the group expects first half FY16 normalised net profit to be between $83 million to $86 million, up an impressive 25% -29% over the prior corresponding period.
SkyCity is heavily leveraged to the growth in tourism in New Zealand and to a lesser extent Australia, as both countries continue to enjoy rocketing numbers of big-spending tourists from Asia.
Similar to Crown Resorts Ltd (ASX: CWN) in Melbourne, SkyCity also operates a monopoly-style complex in a leading international city. This provides competitive advantages and a moat around its earnings growth potential as it is almost impossible for rivals to muscle in on such a dominant operator in a single city.
The flagship Auckland asset unsurprisingly continues to post strong growth, while the Queenstown, Hamilton, Adelaide and Darwin assets all have potential to improve in the second half as they benefit from prior investment.
The valuation of this business is reasonable as well given it trades on around 16x analysts' estimates for forward earnings per share when selling for $4.20.
The business also pays an attractive dividend with an estimated forward yield in the region of 4.8% based on analysts' estimates for dividends per share of 20 cents in the current financial year. Given today's good news the company may in fact beat that amount to deliver a higher yield to income-seeking investors.
Like Crown Resorts, the business does carry a lot of debt due to big construction and development projects across its geographical assets. This places it higher up the risk curve, but with record revenues and improving margins backed up by a dominant Auckland asset, SkyCity has a decent outlook in my opinion.
The kicker is the tailwinds for the tourism sector blowing in from Asia as the best companies in the tourism space may continue to outperform in 2016.
In Australia the falling dollar is another important factor and some of the other strongest tourism-related stocks to watch include; hotel operator Mantra Group Ltd (ASX: MTR), the operator of The Star Casino in Sydney Star Entertainment Group Ltd (ASX: SGR), hotels business Amalgamated Holdings Ltd (ASX: AHD), and Melbourne-based Crown Resorts.
