SkyCity Earnings: Result as Expected, but International VIPs Less Important

Shares in narrow-moat SkyCity Entertainment SKC 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.

Despite the in-line result, we lower our fair value estimate 8% to NZD 3.50/AUD 3.20 per share. We make no material changes to our forecasts for SkyCity’s casinos; the reduction is principally due to lower forecasts for the international business following a strategic review. This business is now restructured. While formerly aimed at international high rollers, the segment is now mostly catering to Australian interstate patrons, with limited international players, since the pandemic. We had previously baked in a partial recovery of this business, albeit significantly below pre-COVID-19 levels given elevated regulatory scrutiny. But with senior roles dissolved and facilities in Auckland and Adelaide repurposed, a recovery will not be forthcoming.

Not included in underlying profit is a NZD 49 million provision for the potential Austrac civil penalty against SkyCity Adelaide. While there is significant uncertainty around the quantum of the penalty, we already expected a fine of about NZD 50 million. Corporate costs increased 32%, much of it regulatory and compliance costs. We expect some of these additional costs to prove permanent with a step-up in headcount.