New Zealand Professional Investment Services Firm

Forsyth Barr

We are proud to be a New Zealand owned firm, with 21 offices throughout the country and over 300 employees. We assist personal, institutional and corporate clients providing a full range of investment services.

Forsyth Barr is a foundation New Zealand Exchange firm (NZX) and accredited market participant. We have been confirmed by the Financial Markets Authority as a Qualifying Financial Entity (QFE).

Research is the cornerstone of our advice. We have one of New Zealand's leading teams of analysts. Our global affiliations ensure comprehensive research coverage of all major investment markets.

New Zealand Professional Investment Services Firm, Forsyth Barr

Equity Bottom-Up

<h2>SKYCITY</h2>
1H20 Result — Accounting Headache
 Chelsea Leadbetter CFA chelsea.leadbetter@forsythbarr.co.nz +64 4 495 5262&nbsp;
Putting aside a plethora of accounting complexity, SKYCITY’s (SKC) 1H20 result and FY20 EBITDA guidance was modestly below our expectations, principally due to a sharp contraction in International Business (IB). SKC offers a solid yield and relative value vs the NZ market, however, valuation metrics in line with (recently de-rated) casino peers &amp; history, a lacklustre near-term EBITDA profile and recently amplified complexity sees us retain NEUTRAL. ​​​​​​​
<table class="table table-striped"><colgroup><col span="12"></colgroup>
<tbody>
<tr>
<td style="width: 48pt;">NZX Code</td>
<td style="width: 48pt;">SKC</td>
<td style="width: 48pt;">Financials:Jun/</td>
<td style="width: 48pt;">19A</td>
<td style="width: 48pt;">20E</td>
<td style="width: 48pt;">21E</td>
<td style="width: 48pt;">22E</td>
<td style="width: 48pt;">Valuation (x)</td>
<td style="width: 48pt;">19A</td>
<td style="width: 48pt;">20E</td>
<td style="width: 48pt;">21E</td>
<td style="width: 48pt;">22E</td>
</tr>
<tr>
<td style="width: 48pt;">Share price</td>
<td style="width: 48pt;">NZ$3.67</td>
<td style="width: 48pt;">NPAT* (NZ$m)</td>
<td style="text-align: left; width: 48pt;">173.0&nbsp;</td>
<td style="text-align: left; width: 48pt;">128.6</td>
<td style="text-align: left; width: 48pt;">125.8</td>
<td style="text-align: left; width: 48pt;">146.6</td>
<td style="width: 48pt;">EV/EBITDA</td>
<td style="text-align: left; width: 48pt;">8.5</td>
<td style="text-align: left; width: 48pt;">10.3</td>
<td style="text-align: left; width: 48pt;">9.8&nbsp;</td>
<td style="text-align: left; width: 48pt;">9.0&nbsp;</td>
</tr>
<tr>
<td style="width: 48pt;">Target Price</td>
<td style="width: 48pt;">NZ$3.70</td>
<td style="width: 48pt;">EPS* (NZc)</td>
<td style="text-align: left; width: 48pt;">25.6</td>
<td style="text-align: left; width: 48pt;">19.1</td>
<td style="text-align: left; width: 48pt;">18.3</td>
<td style="text-align: left; width: 48pt;">21.0&nbsp;</td>
<td style="width: 48pt;">EV/EBIT</td>
<td style="text-align: left; width: 48pt;">11.5</td>
<td style="text-align: left; width: 48pt;">14.9</td>
<td style="text-align: left; width: 48pt;">14.6</td>
<td style="text-align: left; width: 48pt;">13.4</td>
</tr>
<tr>
<td style="width: 48pt;">Risk Rating</td>
<td style="width: 48pt;">Medium</td>
<td style="width: 48pt;">EPS growth* (%)</td>
<td style="text-align: left; width: 48pt;">0.9</td>
<td style="text-align: left; width: 48pt;">-25.4</td>
<td style="text-align: left; width: 48pt;">-3.9</td>
<td style="text-align: left; width: 48pt;">14.5</td>
<td style="width: 48pt;">PE</td>
<td style="text-align: left; width: 48pt;">14.3</td>
<td style="text-align: left; width: 48pt;">19.2</td>
<td style="text-align: left; width: 48pt;">20.0&nbsp;</td>
<td style="text-align: left; width: 48pt;">17.5</td>
</tr>
<tr>
<td style="width: 48pt;">Issued shares</td>
<td style="width: 48pt;">675.8m</td>
<td style="width: 48pt;">DPS (NZc)</td>
<td style="text-align: left; width: 48pt;">20.0&nbsp;</td>
<td style="text-align: left; width: 48pt;">20.0&nbsp;</td>
<td style="text-align: left; width: 48pt;">20.0&nbsp;</td>
<td style="text-align: left; width: 48pt;">20.0&nbsp;</td>
<td style="width: 48pt;">Price/NTA</td>
<td style="text-align: left; width: 48pt;">6.9</td>
<td style="text-align: left; width: 48pt;">14.6</td>
<td style="text-align: left; width: 48pt;">15.5</td>
<td style="text-align: left; width: 48pt;">15.8</td>
</tr>
<tr>
<td style="width: 48pt;">Market cap</td>
<td style="width: 48pt;">NZ$2,480m</td>
<td style="width: 48pt;">Imputation (%)</td>
<td style="text-align: left; width: 48pt;">100</td>
<td style="text-align: left; width: 48pt;">100</td>
<td style="text-align: left; width: 48pt;">100</td>
<td style="text-align: left; width: 48pt;">100</td>
<td style="width: 48pt;">Cash div yld (%)</td>
<td style="text-align: left; width: 48pt;">5.4&nbsp;</td>
<td style="text-align: left; width: 48pt;">5.4&nbsp;</td>
<td style="text-align: left; width: 48pt;">5.4&nbsp;</td>
<td style="text-align: left; width: 48pt;">5.4&nbsp;</td>
</tr>
<tr>
<td style="width: 48pt;">Avg daily turnover</td>
<td style="width: 48pt;">695.3k (NZ$2,681k)</td>
<td colspan="3" style="width: 144pt;">*Based on normalised profits</td>
<td style="width: 48pt;"></td>
<td style="width: 48pt;"></td>
<td style="width: 48pt;">Gross div yld (%)</td>
<td style="text-align: left; width: 48pt;">7.6&nbsp;</td>
<td style="text-align: left; width: 48pt;">7.6&nbsp;</td>
<td style="text-align: left; width: 48pt;">7.6&nbsp;</td>
<td style="text-align: left; width: 48pt;">7.6&nbsp;</td>
</tr>
</tbody>
</table>
Solid result from domestic operations, outweighed by higher corporate costs and IB
SKC&nbsp;reported 1H20 normalised&nbsp;EBITDA&nbsp;of NZ$153m —&nbsp;a ‘like for like’ decline of -8% on the prior year, or +2% growth excluding IB. Despite missing expectations due to a substantial decline in IB, the underlying result quality was solid.
<ul>
<li>Key positives: (1) Auckland — like for like EBITDA growth of ~+4% on the prior year, with gaming revenue growth pre-fire of +6% particularly encouraging; (2) Strong results in Hamilton (EBITDA of NZ$15m, +6%) and Queenstown (EBITDA of NZ$1.5m, +22%); (3) local growth in Electronic Gaming Machines across the group — a key area of recent strategic focus.</li>
<li>Key negatives: (1) Higher corporate costs — a consistent thematic in recent results; (2) Material decline in IB turnover (-40% on the prior year to $4.6bn in 1H20 which is pre-coronavirus); (3) Pressure in hotels (EBITDA of NZ$14m, down -11%); (4) Weak underlying Adelaide result, with 'like for like' EBITDA down -8%, although an improved 2Q does show some positive signs.</li>
</ul>
First ‘clean’ year unlikely until FY23; in the interim EBITDA/EBIT and cashflow best to monitor
SKC's 1H20 result had no shortage of complexity, with multiple adjustments for asset divestments and accounting implications from the NZICC fire. This is unlikely to change near-term. Forecasting NPAT over FY21–22 is difficult, not helped by uncertainty on revised completion timing for the NZICC and Horizon Hotel. We expect the first ‘clean’ year (i.e. first period post its major capital project completion and the associated material step up in depreciation and net interest) for SKC’s P&amp;L to now be FY23.
Our changes&nbsp;— moderate&nbsp;EBITDA&nbsp;downgrades
We have made moderate downgrades to our underlying&nbsp;EBITDA&nbsp;expectations of -4%&nbsp;—&nbsp;with a lift in NZ properties outweighed by lower IB and Adelaide assumptions. Our revised estimates are slightly below lowered&nbsp;SKC&nbsp;FY20 guidance (EBITDA&nbsp;&lt;NZ$300m;&nbsp;NPAT&nbsp;NZ$130m) principally due to a more conservative view on IB given the uncertainty associated with the&nbsp;coronavirus. We lower our target price to NZ$3.70 (prior NZ$4.00) underpinned by our earnings changes, higher longer-term maintenance&nbsp;capex&nbsp;forecasts and lower peer multiples in our sum-of-the parts valuation.

SKYCITY
1H20 Result — Accounting Headache
 Chelsea Leadbetter CFA chelsea.leadbetter@forsythbarr.co.nz +64 4 495 5262&nbsp;
Putting aside a plethora of accounting complexity, SKYCITY’s (SKC) 1H20 result and FY20 EBITDA guidance was modestly below our expectations, principally due to a sharp contraction in International Business (IB). SKC offers a solid yield and relative value vs the NZ market, however, valuation metrics in line with (recently de-rated) casino peers &amp; history, a lacklustre near-term EBITDA profile and recently amplified complexity sees us retain NEUTRAL. ​​​​​​​



NZX Code
SKC
Financials:Jun/
19A
20E
21E
22E
Valuation (x)
19A
20E
21E
22E


Share price
NZ$3.67
NPAT* (NZ$m)
173.0&nbsp;
128.6
125.8
146.6
EV/EBITDA
8.5
10.3
9.8&nbsp;
9.0&nbsp;


Target Price
NZ$3.70
EPS* (NZc)
25.6
19.1
18.3
21.0&nbsp;
EV/EBIT
11.5
14.9
14.6
13.4


Risk Rating
Medium
EPS growth* (%)
0.9
-25.4
-3.9
14.5
PE
14.3
19.2
20.0&nbsp;
17.5


Issued shares
675.8m
DPS (NZc)
20.0&nbsp;
20.0&nbsp;
20.0&nbsp;
20.0&nbsp;
Price/NTA
6.9
14.6
15.5
15.8


Market cap
NZ$2,480m
Imputation (%)
100
100
100
100
Cash div yld (%)
5.4&nbsp;
5.4&nbsp;
5.4&nbsp;
5.4&nbsp;


Avg daily turnover
695.3k (NZ$2,681k)
*Based on normalised profits


Gross div yld (%)
7.6&nbsp;
7.6&nbsp;
7.6&nbsp;
7.6&nbsp;



Solid result from domestic operations, outweighed by higher corporate costs and IB
SKC&nbsp;reported 1H20 normalised&nbsp;EBITDA&nbsp;of NZ$153m —&nbsp;a ‘like for like’ decline of -8% on the prior year, or +2% growth excluding IB. Despite missing expectations due to a substantial decline in IB, the underlying result quality was solid.

Key positives: (1) Auckland — like for like EBITDA growth of ~+4% on the prior year, with gaming revenue growth pre-fire of +6% particularly encouraging; (2) Strong results in Hamilton (EBITDA of NZ$15m, +6%) and Queenstown (EBITDA of NZ$1.5m, +22%); (3) local growth in Electronic Gaming Machines across the group — a key area of recent strategic focus.
Key negatives: (1) Higher corporate costs — a consistent thematic in recent results; (2) Material decline in IB turnover (-40% on the prior year to $4.6bn in 1H20 which is pre-coronavirus); (3) Pressure in hotels (EBITDA of NZ$14m, down -11%); (4) Weak underlying Adelaide result, with 'like for like' EBITDA down -8%, although an improved 2Q does show some positive signs.

First ‘clean’ year unlikely until FY23; in the interim EBITDA/EBIT and cashflow best to monitor
SKC's 1H20 result had no shortage of complexity, with multiple adjustments for asset divestments and accounting implications from the NZICC fire. This is unlikely to change near-term. Forecasting NPAT over FY21–22 is difficult, not helped by uncertainty on revised completion timing for the NZICC and Horizon Hotel. We expect the first ‘clean’ year (i.e. first period post its major capital project completion and the associated material step up in depreciation and net interest) for SKC’s P&amp;L to now be FY23.
Our changes&nbsp;— moderate&nbsp;EBITDA&nbsp;downgrades
We have made moderate downgrades to our underlying&nbsp;EBITDA&nbsp;expectations of -4%&nbsp;—&nbsp;with a lift in NZ properties outweighed by lower IB and Adelaide assumptions. Our revised estimates are slightly below lowered&nbsp;SKC&nbsp;FY20 guidance (EBITDA&nbsp;&lt;NZ$300m;&nbsp;NPAT&nbsp;NZ$130m) principally due to a more conservative view on IB given the uncertainty associated with the&nbsp;coronavirus. We lower our target price to NZ$3.70 (prior NZ$4.00) underpinned by our earnings changes, higher longer-term maintenance&nbsp;capex&nbsp;forecasts and lower peer multiples in our sum-of-the parts valuation.

SKYCITY: 1H20 Result — Accounting Headache

Skycity Entertainment

SKYCITY: 1H20 Result — Accounting Headache