New Zealand is emerging from its extended period of obeisance to COVID restrictions, and this is infusing SkyCity Entertainment with much needed customer visitation. FY22f earnings are meaningless for valuation purposes given the extended property closures.
New Zealand brought forward its shift from ‘red’ to ‘orange’ alert settings from 14 April 2022. This has allowed a swift return to movement within the country, but international tourists will be led by Australians then others at a more cautious pace. We think this can resuscitate SKC’s FY23f earnings to a more normal level with consensus EBITDA numbers indicating the same sentiment.
In 1H22, SKC’s key Auckland property was shut for 107 days before re-opening under heavy restrictions in December 2021. The gradual re-opening of the economy has enabled kiwis to travel more freely domestically, but international tourists remain thin on the ground.
The annual result to be reported on 25 August should be the next catalyst for the stock. By then, the company should have a much better handle on the extent of its labour supply challenges and inflation pressures more generally. We think margins can return to pre-COVID levels by FY23f, incorporating the cost cutting measures made in 2H20 and FY21.
SKC has recently successfully cleared the NZ DIA (Dept of Internal Affairs) periodic review into its AML policies and procedures. SKC is currently involved in an AUSTRAC enforcement investigation relating to various IB/VIP player transactions at the Adelaide casino in FY16 and FY19. We anticipate any potential fines resulting from this to be fairly minor as the management has changed since then and any AML framework issues will have been fixed.
Investment view
COVID-19 and the New Zealand Government’s heavy-handed approach to restrictions has hammered SKC’s New Zealand operations in the last two years. The current share price continues to imply no value for the Adelaide property, the online casino and SKC’s International Business operations. SKC’s value is underpinned by its premium, monopolistic, cash generative licences.
Blackstone’s takeover offer for CWN and the regulatory cauldron that both CWN and SGR have endured over the past year have distracted attention from SKC, in our view. The company is currently trading on a FY24f PE ratio of ~12x eps and a dividend yield of 7.0% based on consensus numbers. The FY24f EV/EBITDA multiple of 6.5x compares to the takeover multiple for CWN of 14.5x FY24f and SGR’s multiple of 7.8x FY24f.
The FY22 result will reflect barely half of SKC’s potential run-rate, but earnings could quickly recover through the next two years.
Risks to investment view
SKC’s earnings recovery is dependent on the New Zealand economy regaining full functionality post- COVID restrictions being eased. This is a gradual and cautious approach but beyond SKC’s control.
Recommendation
We have retained our Buy recommendation.
