Sky City’s pandemic experience was severe, but it is well on the way to a full recovery, subject to a jittery NZ government getting out of the way.
SKC’s key Auckland property was closed for 107 days in FY22 resulting in EBITDA halving on last year. The other New Zealand properties also suffered at the hands of mandated closures (Hamilton 65 days, Queenstown 22 days) while the Adelaide casino escaped with just 8 days of closure. Stating the obvious, earnings were decimated as a consequence of the closures and restrictions that kept patrons well away from the properties.
Group normalised EBITDA of NZ$137.9 million was at the top end of guidance but 45% down on FY21.
Operating restrictions were removed in 4Q22 and SKC has seen an encouraging return to full activity in both countries. SKC said it sees a ‘credible pathway for a return to pre COVID-19 earnings during FY23f, subject to a range of things returning to normality. SKC said it had achieved EBITDA of around NZ$20 million in each of May and June 2022, similar to pre COVID levels even with table games still struggling with labour shortages.
The NZICC fire of October 2019 was a significant setback for the Auckland precinct. SKC is expecting the 300-room Horizon Hotel and the Convention Centre to be delivered in 2024 and 2025 respectively for an expected final total cost of NZ$750 million (NZ$150m to still to be spent).
Press speculation that SKC is looking to sell its Adelaide casino, which it has owned since 2000, is not correct, according to the company. Adelaide is also getting back to normality as 4Q22 EBITDA equated to ~40% of FY22 EBITDA. The swanky 120-room Eos by SkyCity hotel is a strong addition to the precinct and houses the casino’s VIP gaming facilities along with a 650-guest convention centre.
Investment view
A return to normal levels of profitability is welcome news but comes with the caveat that New Zealand is lagging Australia on its COVID recovery pathway. There is a strong level of domestic visitation to the Auckland property so the reliance on international tourists is less of an issue for SKC.
The significant decline in VIP gaming is being partially offset by the new NZ online casino which has made a bright start and is already contributing meaningfully to earnings. If the NZ government transitions to a regulated online market, SKC estimates the market potential to be $350 million pa.
The NZ government still has the country on its ‘orange’ alert level having only moved off ‘red’ in April this year. The overzealous approach to health policy remains a risk for SKC as the country is yet to go ‘green’ or fully back to normal. The NZ economy is also experiencing rapidly rising interest rates that could curb consumer spending.
Otherwise, SKC is relatively free of the regulatory storms that have engulfed Crown Resorts and Star Entertainment Group. The SA regulator’s inquiry into SKC on the back of AUSTRAC’s enforcement investigation is unlikely to turn up as much dirt and we think any potential fine from adverse findings would be minor.
There is plenty of value still in the share price, in our view. We assume a resumption of the dividend in 1H23f and see the PE ratio of 17x FY23f consensus EPS as undemanding.
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.
FIGURE 1: FY22 RESULT
