EUR 850.00 For Business Accounts Only

Morningstar | Auckland and VIP Business Support Strong 1H of Fiscal 2019 for SkyCity Entertainment

Narrow-moat-rated SkyCity Entertainment started the year on a positive note, reporting fiscal 2019 interim normalised NPAT of NZD 97 million, an 11% increase on the previous corresponding period, or pcp. The result was driven by strong performance in Auckland and International VIP, which collectively make up around 80% of group EBITDA. Management guided to around 5% growth in normalised EBITDA during fiscal 2019 (assuming the sale of the Darwin casino settles on June 30, 2019), which is marginally below our forecast, and mainly reflects a softening second half. We have trimmed our near-term earnings estimates by around 2% on average, although we maintain our NZD 4.20 (AUD 4.00) per share fair value estimate. The board declared an interim dividend of NZD 10 cents per share, in line with the prior period.

We continue to believe SkyCity shares are slightly undervalued. The current price offers shareholders a healthy 5% dividend yield, fully imputed for New Zealand tax residents. Additionally, we are attracted to the company’s portfolio of monopoly casino licences, which underpins its narrow moat rating.

Auckland delivered strong results with revenue and EBITDA growing by 6% and 5%, respectively. The strong revenue was supported by new electronic gaming machines, changes to floor layout, and positive table results as the firm started to reap the benefits from automated table games. Auckland revenue should grow at a similar, moderate pace until 2021 when we expect growth to increase to low-double digits as the new convention centre comes online. The EBITDA margin in the half was slightly softer than we had previously forecast, although this was an outcome of increased investment into technology and digital capabilities. We believe this is nothing to be alarmed about and forecast Auckland’s EBITDA margin to remain steady at around 45% for at least the next three years.

International business, or IB, was a standout performer in the first half with turnover at almost NZD 8 billion, a record result, up 74% on the pcp. This strong performance reflects increased use of junkets, major customers returning to the region, and higher average spend per customer. IB growth is likely to moderate in the second half, cycling a stronger comparable period, and we continue to forecast fiscal 2019 turnover of NZD 13.5 billion. Over the long run, we project VIP to grow at a more modest mid-single-digit pace on average. During the period, the actual win rate was weaker than expected, coming in at 0.98% compared with the theoretical 1.35% win rate. While this does not impact normalised earnings, it will certainly dent statutory earnings and cash flow. We were pleased to see IB’s EBITDA margin increase to 24% from 16%, which reflected operating leverage and reduced bad debts. We forecast IB’s EBITDA margins hover around the 22% mark over the next five years, in line with the long-term average, and peer levels.

The construction of the New Zealand International Convention Centre, or NZICC, has been hit by delays, and is now expected to open in the second half of 2020, approximately six months later than previously expected. This is disappointing, and while it does not impact our long-term view of the project, it will push the earnings uplift out slightly. Nonetheless, management remain confident their contractual position will see them compensated for most of the cost of delays. The project has incurred an additional NZD 25 million cost in removing the ACP cladding (the material linked to fires including the Grenfell Tower in London) from the NZICC facade. Additionally, capital expenditures timing will be further delayed, and now the bulk will take place during fiscal 2020. Notwithstanding, the total project cost, net of liquidated damages is not expected to be materially above the originally budgeted NZD 703 million. The Adelaide expansion project on the other hand is tracking on time and within budget.