SkyCity’s 1H Rebounded Strongly as Restrictions Eased

We maintain our NZD 3.80 (AUD 3.50) fair value estimate for shares in narrow-moat SkyCity SKC 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.

The core Auckland property rebounded strongly during the half, with underlying EBITDA rising sevenfold to NZD 128 million. The casino is benefiting from reduced pandemic restrictions, with no forced closures during the period, compared with 107 days closed in the PCP. International tourism is also returning strongly after New Zealand borders reopened. SkyCity’s long-dated and exclusive licence in Auckland creates a regulatory barrier to entry, underpinning the firm’s narrow economic moat and placing it in a strong position to benefit from the recovery in New Zealand tourism.

Cost pressures are higher at the Adelaide property, particularly in compliance and governance as the firm faces money laundering investigations from anti-money-laundering watchdog AUSTRAC and a review into its suitability to hold a casino licence in South Australia—about 10% of earnings. Granted, the review may uncover operational failings at the property, such as insufficient money laundering controls or failures to reduce gambling-related harm. But like the reviews faced by Crown and Star, should SkyCity be found “unsuitable,” we expect the casino would be provided with an opportunity to prove suitability and ultimately continue to operate the Adelaide property. See our note published on Dec. 23, 2022: “SkyCity Looks Cheap Despite Adelaide Inquiry.”