Company Reports

The Australian Transaction Reports and Analysis Centre has landed on a AUD 67 million civil penalty in relation to SkyCity Adelaide’s historical failure to comply with anti-money-laundering rules. The fine itself—about NZD 73 million—is a little better than our NZD 79 million expectation, but not materially so. More prominently, the fine now reduces some of the uncertainty hanging over the company.

We lower our fair value estimate for shares in SkyCity by 6% to NZD 3.30 (AUD 3.10) due to a structurally higher compliance cost base and higher-than-expected one-off fines. Interim fiscal 2024 underlying EBITDA fell 10% on the previous corresponding period to NZD 146 million—broadly in line with our unchanged NZD 289 million forecast. The weaker discretionary spending environment is seeing a reduction in spending by the mass market, weighing on casino earnings, particularly gaming machine play. But shares continue to screen undervalued. We think the market is overly concerned by regulatory headwinds, overlooking SkyCity’s strong earnings potential. We forecast a five-year EPS CAGR of 7% over the next five years, underpinned by the recovery from the current cyclical downturn and a solid performance from the core Auckland property, which underpins the firm’s narrow economic moat.

We expect SkyCity to deliver strong earnings growth over the next decade, buoyed by the recovery from cyclical lows and solid performance from its core assets in Auckland and Adelaide. SkyCity's Auckland and Adelaide properties underpin the firm's narrow economic moat. SkyCity is the monopoly operator in both jurisdictions, with long-dated licences (exclusive licence for Auckland expires in 2048, and Adelaide licence expires in 2085 with exclusivity guaranteed until 2035). These properties have performed strongly, thanks to SkyCity's solid record of reinvestment, resulting in high property quality, stable visitor growth, and earnings resilience.

We expect SkyCity to deliver strong earnings growth over the next decade, buoyed by the recovery from coronavirus-induced lows and solid performance from its core assets in Auckland and Adelaide. SkyCity's Auckland and Adelaide properties underpin the firm's narrow economic moat. SkyCity is the monopoly operator in both jurisdictions, with long-dated licences (exclusive licence for Auckland expires in 2048, and Adelaide licence expires in 2085 with exclusivity guaranteed until 2035). These properties have performed strongly, thanks to SkyCity's solid record of reinvestment, resulting in high property quality, stable visitor growth, and earnings resilience.

We maintain our NZD 3.50 (AUD 3.20) fair value estimate for shares in SkyCity Entertainment. Fiscal 2024 is shaping up to be more challenged than we and the company initially anticipated. The weaker discretionary spending environment is weighing on New Zealand casinos, particularly gaming machine play. The earnings outlook is also hurt by delayed settlement of the Auckland car park concession, which is expected to contribute NZD 15 million to NZD 18 million in annual EBITDA. Further, compliance and legal costs continue to weigh on SkyCity Adelaide's performance.

We maintain our NZD 3.50 (AUD 3.20) per-share fair value estimate for narrow-moat SkyCity Entertainment. However, we now expect SkyCity’s New Zealand casino license will be suspended for 10 days in fiscal 2024, after New Zealand’s Department of Internal Affairs alleged SkyCity failed to comply with its regulatory obligation to monitor continuous play by a customer between 2017 and 2021. We calculate a 10-day gaming suspension in SkyCity’s Auckland, Hamilton, and Queenstown casinos would see fiscal 2024 revenue and EBITDA fall by around NZD 20 million, or AUD 18 million, but make no changes to our longer-term forecasts. We lower our fiscal 2024 EPS forecast by 10% to NZD 0.18 or AUD 0.17. We assume SkyCity’s other operations, including the Adelaide casino and online gaming, will not be affected. Segments likely to be hit by the suspension accounted for 86% of earnings from operations in fiscal 2023.

Shares in narrow-moat SkyCity Entertainment continue to screen materially undervalued. Fiscal 2023 results were broadly in line with our forecasts. Underlying EBITDA more than doubled to NZD 310 million—meeting our forecast and the top of the firm's guidance range. All SkyCity's properties enjoyed significant revenue and earnings growth, with reduced pandemic restrictions—including no forced closures in fiscal 2023 and the reopening of the New Zealand border. On a consolidated basis, gaming machine and table gaming revenue grew about 50% compared with fiscal 2022.

We maintain our NZD 3.80 (AUD 3.50) fair value estimate for shares in narrow-moat SkyCity following the release of interim fiscal 2023 results. First-half underlying EBITDA of NZD 162 million is more than triple the heavily restricted prior corresponding period. Profitability is back in line with precoronavirus levels, as strong gaming machine performance offsets a more gradual recovery in table gaming. We lift our fiscal 2023 EBITDA forecast 2% to NZD 315 million, near the middle of guidance at NZD 305 million to NZD 320 million. Our longer-term forecasts remain broadly unchanged.

We maintain our NZD 3.80 (AUD 3.50) fair value estimate for shares in SkyCity following a trading update. The firm is eyeing improved conditions in domestic venues as New Zealand coronavirus restrictions are relaxed and international tourists return. Consequently, SkyCity management expects a full-year fiscal 2022 EBITDA of between NZD 135 million and NZD 140 million.

We maintain our NZD 3.80 fair value estimate for shares in SkyCity Entertainment ahead of the release of first-half fiscal 2022 earnings on Feb. 14, 2022. COVID-19 continues to weigh heavily on the firm's near-term outlook. The Auckland casino--SkyCity's core property--waded through over 100 days in lockdown during the period, heavily affecting visitor numbers at the group's venues in the first half of fiscal 2022. Additionally, visitor numbers to the group's second-biggest venue in Adelaide were subdued as capacity restrictions and domestic border closures in South Australia persistent for most of the first half of fiscal 2022. But we continue to view these as short-term issues, and we expect SkyCity to bounce back when restrictions ease. SkyCity's long-dated and exclusive licences in Auckland and Adelaide create a regulatory barrier to entry, underpinning the firm's narrow economic moat, and position the business well to participate in the recovery as restrictions ease. With a balance sheet well-positioned to weather the storm, we think current depressed prices present an opportunity for patient investors to gain exposure to a high-quality gaming business at a discount. However, the path to full capacity is likely to be gradual and material short-term catalysts are lacking. We expect the recovery of SkyCity's EBITDA to its prepandemic levels to take until fiscal 2023.

We raise our fair value estimate for narrow-moat SkyCity Entertainment 3% to NZD 3.50 (AUD 3.25 at the current exchange rate) on improved near-term earnings. Strong performance from the New Zealand gaming business and an uplift in domestic tourism activity in New Zealand and South Australia is leading to better-than-expected fiscal 2021 earnings. We raise our fiscal 2021 EBITDA forecast by 5% to NZD 250 million, in line with updated guidance. Shares have rallied following the updated guidance and are now trading in line with our revised fair value estimate. We expect SkyCity to pay a fully franked final dividend of NZD 0.05 per share, representing a 40% payout ratio of full year underlying earnings per share.

We raise our fair value estimate for shares in SkyCity by 3% to NZD 3.40 (AUD 3.20) following the release of interim fiscal 2021 results. With border closures leading to virtually nonexistent high roller revenue, and lockdowns and social distancing requirements weighing on domestic earnings, SkyCity reported underlying EBITDA of NZD 120 million, down 22% on the previous corresponding half. But there is room for optimism. With long-dated and exclusive licences creating barriers to entry (underpinning the firm's narrow economic moat), we think SkyCity's Auckland and Adelaide casinos are well-positioned to participate in the recovery as restrictions ease. We expect improvement in the second half and lift our underlying fiscal 2021 EBITDA forecast by 10% to NZD 238 million. As expected, SkyCity declared no interim dividend. However, the firm intends to pay a final dividend and pursue a payout ratio of between 60% and 90% underlying EPS. We now forecast fiscal 2021 dividends of NZD 0.05 per share--we had previously not anticipated dividends until fiscal 2022.

We expect SkyCity to deliver strong earnings growth over the next decade, buoyed by the recovery from current coronavirus-induced lows and solid performance from its core assets in Auckland and Adelaide. SkyCity's Auckland and Adelaide properties underpin the firm's narrow economic moat. SkyCity is the monopoly operator in both jurisdictions, with long-dated licences (exclusive licence for Auckland expires in 2048, and Adelaide licence expires in 2085 with exclusivity guaranteed until 2035). These properties have performed strongly, thanks to SkyCity's solid record of reinvestment, resulting in high property quality, stable visitor growth, and earnings resilience. The quality of these assets, particularly SkyCity Auckland, has helped build the firm's VIP gaming business.

SkyCity's underlying net profit after tax, or NPAT, for fiscal 2014 of NZD 123.2 million was below our forecast of NZD 127.6 million. This reflects softer-than-expected results from all properties except the flagship Auckland business which was strong. We underestimated the disruptions in Adelaide caused by the current renovation work. We expect gaming revenue to be soft in Adelaide in fiscal 2015 as the first half is likely to see further disruption. Moreover, SkyCity is likely to ramp up marketing initiatives (justifiably so) to woo interstate players to Adelaide, lifting costs in the near term. The Auckland gaming business is also unlikely to see any material revenue and earnings improvement from additional gaming machines in 2015 as those products will be available only towards the end of 2016. Given these headwinds and soft conditions in Darwin and Hamilton, we anticipate a 4% to 5% cut to our current fiscal 2015 NPAT forecast of NZD 132.3 million.

We are lowering our fiscal 2014 and 2015 forecasts for Sky City to account for the significant disruptions to the Adelaide casino and some one-off costs incurred during the transformation program. The company is spending AUD 320 million to transform the Adelaide casino into an integrated gaming complex with a boutique five-star hotel, signature restaurants and a much improved gaming product. We continue to believe that Adelaide’s EBITDA will more than double to AUD 100 million in 2019 due to higher foot traffic, a lift in unit revenue per machine (due to significant premium gaming) and substantially lower electronic gaming machine, or EGM, taxes.

Skycity Entertainment's first-half fiscal 2014 results came out in line with guidance provided in December. Underlying net profit after tax, or NPAT, was NZD 66.4 million, within the guidance of NZD 65 to NZD 68 million and compares with NZD 72 million posted in the previous corresponding period. The negative impact of the significant rise in the New Zealand dollar versus the Australian dollar was NZD 2.4 million. The rest of the decline was due to lower earnings from Hamilton and the Australian casinos. We increase our fiscal 2014 forecast slightly to NZD 132 million, reflecting lower depreciation costs but keep our fiscal 2015 estimate intact at NZD 148 million. Our fair value estimate remains unchanged at NZD 4.60 per share as we have not changed our long-term projections.

Sky City advised that underlying net profit after tax, or NPAT, for first-half fiscal 2014 is expected to be in the range of NZD 65 million to NZD 68 million compared with NZD 72 million last year. The impact of currency appreciation is likely to be NZD 3 million while sluggish business conditions, especially in Darwin and Hamilton, and disruptions in Adelaide are likely to affect earnings by NZD 1 to NZD 4 million. In light of the guidance and the continuing uptrend in the New Zealand dollar, we are lowering our fiscal 2014 forecast to NZD 130 million from NZD 135 million and our fiscal 2015 forecast from NZD 154 million to NZD 148 million. However, our fair value estimate remains unchanged at NZD 4.60 per share as we have not changed our long-term projections. Our outer-year forecasts assume a New Zealand dollar/Australian dollar exchange rate of 0.80. However, should the exchange rate increase to 0.87, our fair value would reduce by NZD 0.35 per share to NZD 4.25 per share, all else being equal.

At its annual general meeting, or AGM, Skycity Entertainment Group provided a trading update and outlook for fiscal 2014. Skycity's performance to date was subdued, and the significant appreciation of the New Zealand dollar versus the Australian dollar did not help matters. We are, however, sticking to our fiscal 2014 and fiscal 2015 profit forecasts of NZD 135 million and NZD 154 million respectively. Our fair value estimate also remains unchanged at NZD 4.60 per share. However, we are raising our Australian dollar fair value to AUD 4.10 per share from AUD 3.60 per share, reflecting the depreciation of the Australian dollar. We believe Skycity's shares are undervalued, with favourable risk/reward characteristics and feel that the market is not pricing in the upside from the expansion of Adelaide and Auckland casinos. We reaffirm our narrow Morningstar Economic Moat Rating due to the firm's long-dated monopoly casino licenses in all the jurisdictions in which it operates.

Skycity Entertainment Group, or Skycity, will invest NZD 402 million in constructing the New Zealand International Convention Centre in Auckland after reaching an agreement with the New Zealand government. In exchange for constructing the convention centre, Skycity has obtained regulatory relief from the government, allowing it to significantly increase the number of machines and tables at the Auckland casino and operate cashless gaming across all machines. These changes will propel earnings growth and deliver strong returns over time. While the Auckland and previously announced Adelaide projects will stretch Skycity's balance sheet, we do not think its investment-grade credit rating is under threat and, consequently, an equity raising is unlikely. We reaffirm our narrow Morningstar Economic Moat Rating due to the firm's long-dated monopoly casino licenses in all the jurisdictions in which it operates.

Auckland's underperformance led to slightly disappointing full-year results. Underlying net profit after tax (NPAT) of NZD 136.3 million came in line with our expectations but was essentially driven by lower interest and depreciation costs. Normalised earnings before interest, tax depreciation and amortisation (EBITDA) of NZD 303 million was below our NZD 310 million forecast. Australian properties performed in line, but the high New Zealand dollar dampened earnings. International VIP results also contributed positively. The dividend increased 17.6% to NZD 0.20 per share, which is mainly a reflection of a significant lift in the payout rate to 84% from 69%. This is in line with the board's revised policy of paying out a minimum of 80%. We are not making any changes to our forecasts or our NZD 4.60 fair value for Skycity.