New Zealand’s heavy-handed approach to COVID has severely impacted SkyCity’s interim result. The recovery will take time and is skewed towards FY23 and beyond as the country tip-toes its way through the pandemic.
SKC’s New Zealand properties were significantly impacted by COVID during the period. The Auckland property was closed for 107 days before re-opening on restricted settings on 3 December 2021. Less material but just as affected were the Queenstown (22 days) and Hamilton (65 days) casinos which are also open but under operating restrictions. Operating earnings in Auckland eked out normalised EBITDA of NZ$118.5 million, barely half of what was produced in 1H21.
In contrast, the Adelaide casino was only closed for 8 days in July 2021 albeit with the usual smorgasbord of operating restrictions imposed since reopening. The burst of workforce disruptions due to Omicron late in the period affected staff availability but capacity limits have recently been eased. Interstate borders have progressively been opened since December with the exception of Western Australia. International borders are also about to re-open but the ramp-up will be hesitant. The Adelaide casino generated normalised EBITDA of A$10.8 million (excl IB), down 54.8% on last year as the business took on higher fixed costs from the expansion, particularly in non-gaming (hotels and food and beverage). Gaming revenue performance has otherwise been good, particularly in EGMs.
The NZICC fire in October 2019 is still having repercussions and causing significant delays to the project. The latest completion dates are set at 2024 for the adjacent Horizon Hotel and 2025 for the NZICC project.
In between time, SKC has been beavering away at progressing its online gaming business which has been successful off a low base so far. SKC says the addressable market is valued at over NZ$300 million and could become a meaningful earnings contributor in time.
Investment view
SKC’s earnings recovery is in the hands of New Zealand’s ‘traffic light’ system which determines the level of COVID restrictions. The Omicron variant is new to the country suggesting an elongated pathway back to normal. EGMs are expected to perform well as restrictions are eased but New Zealand’s international borders are only being gradually unlocked through this calendar year.
SKC’s long period of expansion capex is nearing an end and the company is anticipating a period of strong cash flow generation as earnings recover and capex remains low.
SKC is now experiencing the common theme of inflationary pressures from labour supply challenges although these should be temporary in nature.
We see New Zealand’s COVID restrictions easing through April and May this year with international borders re-opening progressively throughout 2022.
No interim dividend was declared but we think this will be reinstated from 1H23f as SKC regains more normal operating conditions.
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. This is a recognition of the emaciated state of earnings but with a recovery likely in FY23f. The share price is only reflecting value for land and buildings. FY23f metrics are a more realistic indicator where the free cash flow yield is 6%, the dividend yield around 5% and a PE ratio of approximately 14x. Current pricing is implying nil value for the Adelaide property.
