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Morningstar | SkyCity’s 2H Performance Softer than Expected, FVE Unchanged

Narrow-moat-rated SkyCity Entertainment is experiencing a softer second half and has trimmed earnings guidance by around 2%-3%. Financial year-to-date group normalised revenue is up 4% on the previous corresponding period, or pcp, (up 6% excluding Darwin). A healthy 8% increase in electronic gaming machine, or EGM, activity in the second half to date has been offset by weaker table games and nongaming performance. We have pulled back our near-term EBITDA projections by around 6% on average (during the next three years) to reflect the softer trading performance, the earlier-than-expected divestment of the Darwin casino, and with the recently announced sale of the Auckland carpark concession. However, as these assets were sold at reasonable prices, and we believe the trading softness to be temporary, the impact on our intrinsic assessment is negligible. Accordingly, we maintain our NZD 4.20 (AUD 4.00) per share fair value estimate. At current levels, the stock is slightly undervalued.

The company guided to normalised EBITDA to be flat in fiscal 2019, although up 2% if we were to exclude the recently divested Darwin facility. This compares with prior guidance of 5% growth. Group normalised NPAT is expected to be slightly below the pcp due to a higher effective tax rate which had a NZD 6 million impact. This compares with our estimate of 1% growth. This was partially because the sale of the Darwin casino occurred around three months earlier than our expectation. Additionally, the company cited a weak second half on tables, while nongaming is also performing below expectations, as the company was forced to cut hotel rates slightly to defend occupancy in what is currently an oversupplied market. We attribute these headwinds to the softening consumer environment, cooling housing market, and weaker tourism, none of which we believe are structural in nature.

A positive takeaway was the solid performance in international VIP, which financial year-to-date has turned over NZD 11.6 billion, a 33% increase on the pcp. At the current pace, the firm is on track to reaching our NZD 13.5 billion turnover forecast by fiscal 2019 year-end. As we have highlighted in previous research, Australia and New Zealand’s share of the global VIP market is very low and should continue to grow as the key casinos are receiving major upgrades and the addition of Crown Sydney will likely attract players to the Australasian region. Based on our projections, turnover should exceed NZD 15 billion by fiscal 2021.

The firm recently undertook a couple of divestments which should alleviate any concerns regarding the funding of the major projects in Auckland and Adelaide. The firm sold the Darwin casino for AUD 188 million, the Auckland carpark concession for NZD 220 million, and the Federal Street carpark for NZD 40 million. We’ve incorporated these asset sales in our forecasts, upon divestment the firm’s net debt will decline to 1.4 times fiscal 2020 EBITDA, compared with 1.9 had they not taken place. This is an extremely comfortable position, and supportive of the firm’s 80% minimum dividend payout ratio.

The main attraction remains the firm’s major growth projects, both of which are still progressing according to the recently revised timeline. Despite contractual completion deadlines having passed for both the NZICC and Horizon hotel, the firm has reiterated the total NZD 703 million cost for the project (net of liquidated damages). We forecast both the NZICC and the Horizon hotel to open by the start of fiscal 2021. The Adelaide remains on time and within the AUD 330 million budget. The expansion is set to open during fiscal 2021 (September 2020), at the same time as the opening of the adjacent carpark, which should alleviate what has historically been a major missing component for the Adelaide gaming property.