SkyCity Entertainment is doggedly clawing its way back into shape and presented a gutsy interim result signalling the earnings recovery is underway. The economic environment is challenging, not to mention the weather and a slow return of international visitors.
In line with market expectations, SKC’s 1H23 result contained only a couple of minor pleasant surprises. The key Auckland property had a very good revenue outcome in EGM revenue which fluffed up the EBITDA margin to over 45%, just like the old days. Cash conversion was strong at 98% and the interim dividend of 6cps was expected.
In Adelaide, business inched ahead to EBITDA of A$20.6m while the regulator (CBS) and AUSTRAC conduct their respective inquiries.
Further regulatory imposts are landing on the New Zealand businesses concerning anti money-laundering compliance although the local regulator has not found fault here. The same compliance pressure is affecting the Adelaide casino.
SKC’s International Business has become almost immaterial as overseas big shots stay away.
The roof is going on the NZICC (convention centre) and SKC has NZ$138m net capex to go on this troubled project.
Former Tabcorp boss, David Attenborough, is set to join the SKC Board in March.
Investment View
A famine must surely be next, or pestilence perhaps. SKC has endured a prolonged fightback from the horrible Convention Centre fire in 2019, survived extended mandatory property shutdowns throughout the pandemic and, following this latest interim period, has coped with the national emergency caused by cyclone Gabrielle which has badly impacted the upper North Island.
But kiwis are made of stern stuff, as the Wallabies well know.
Perversely, the NZICC fire obviously prevented the NZ$750m project from opening on the eve of the COVID-19 pandemic and its current projected full completion date is now December 2027.
The pandemic had no enduring recovery benefits but the regulatory shakeout across the Tasman echoed into New Zealand and has effectively fumigated SKC’s operations too. There is an on-going AUSTRAC investigation in Australia that we expect SKC will receive a fine, but otherwise the company has behaved in exemplary fashion compared to its Australian counterparts.
SKC Adelaide currently has a tax guarantee in place until 2035 which should withstand any attempt to copy the NSW Government’s tax hike being imposed on SGR. Cashless gaming is almost certainly coming to all SKC properties from around FY26 for which pilot testing has begun in Adelaide private gaming rooms. Additionally, a $5k per day customer cash limit and $2k per transaction limit on main gaming floor tables is being trialled.
SKC has modestly upgraded its guidance for FY23f EBITDA to just ahead of pre-COVID FY19 levels and is pointing to a consensus estimate range of NZ$305-320m. That would be a good outcome as long as the cyclone does not impact on earnings and cost increases are well managed.
The new convention centre, the new Auckland hotel together with the now mostly completed Adelaide revamp positions SKC nicely to crank out some better earnings numbers in the next few years. Touch wood that its luck can hold out against any further divine interruptions.
On a FY23f PER of 15x and EV/EBITDA multiple of 8x, SKC looks good value compared to what we know it is capable of delivering.
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: 1H23 RESULT
Figure 2: NORMALISED EBITDA
