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>
<p><strong>Another Count of the Cash</strong></p>
<p><strong>OUTPERFORM</strong></p>
<p>The backdrop and restrictions for re-opening is becoming clearer for SKYCITY's (SKC) New Zealand properties, however, the demand recovery path remains highly uncertain. SKC has managed costs and cash well during closure, and better than we had initially anticipated. This will remain a key near-term area of focus to match what we expect to be a slow demand recovery, particularly while substantial restrictions are in place (i.e. NZ's Alert Level 2). There is no shortage of challenges for SKC to navigate in the months ahead and we expect to see some battle scars, however, its asset base and long-term monopoly casino licences continue to provide comfort of value above current market pricing.</p>
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<p><strong>NZ Alert Levels&nbsp;— restrictions and re-opening path clearer, demand profile still the key unknown</strong></p>
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<p>Our base case assumes NZ&nbsp;moves to Alert Level 2 on 19 May (hence, property closure duration of eight weeks), with a step down to Alert Level 1 in early September&nbsp;— the latter is likely to be the most meaningful change for&nbsp;SKC. The re-opening path for Adelaide looks likely to be later, albeit is more challenging to predict. While&nbsp;NZ's&nbsp;Alert Level system (and signalled re-opening plans from&nbsp;SKC) provide&nbsp;a guide to what restrictions will be in place, it doesn't help us to assess customer response. We don't believe the demand profile is likely to follow the same stepped path, with a gradual improvement more likely.&nbsp;While we expect some level of pent up demand on re-opening, there is also likely to be a high level of consumer caution, particularly initially. We make small adjustments to our near-term&nbsp;EBITDA&nbsp;forecasts (-2-3%; shorter closure duration offset by greater disruption as it&nbsp;progressively re-opens).</p>
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<p><strong>Cash well managed to date; more clarity wanted on liquidity/funding plans</strong></p>
<div id="m_-8241514350234940504i4dhu">
<p>Cash opex has been well managed during the closure period, helped by deeper permanent cuts than we anticipated, while total cash burn is broadly as expected (-NZ$30–40m/month). SKC confirmed liquidity available of ~NZ$400m and indicated it does not expect to require any waivers for its 30 June 2020 debt covenants. We concur. However, the temporary EBITDA shock looks highly likely to create a challenge for covenants at 31 December 2020. Potential implications range from waiver to repayment, and will depend on discussions with each of its funding groups. SKC has liquidity to cover some repayment, however, not all. SKC may look to increase existing banking facilities and there is also a reasonable risk additional equity will be necessary to support the balance sheet.</p>
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<p><strong>Risk/reward still positively skewed</strong></p>
<div id="m_-8241514350234940504imrz3">
<p>Despite a recent recovery, SKC's market capitalisation has still declined by ~NZ$1bn since the COVID-19 outbreak took hold in China, substantially larger than our various scenarios of the risk/cashflow impact. SKC's share price has largely tracked global casino peers through 2020, despite its greater reliance on domestic/local visitation (vs tourists), and more recently, the potential for a shorter duration of disruption in NZ from the virus (vs other countries). Recent sector transactions/M&amp;A interest also provide a reminder of the attraction of the assets (property and casino licences) which is difficult to replicate, particularly at current prices.&nbsp;</p>
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<div><strong>Chelsea Leadbetter CFA</strong></div>
<div><a href="mailto:chelsea.leadbetter@forsythbarr.co.nz" target="_blank" rel="noopener">chelsea.leadbetter@<wbr>forsythbarr.co.nz</a></div>
<div>+64 4 495 5262</div>
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SKYCITY
Another Count of the Cash
OUTPERFORM
The backdrop and restrictions for re-opening is becoming clearer for SKYCITY's (SKC) New Zealand properties, however, the demand recovery path remains highly uncertain. SKC has managed costs and cash well during closure, and better than we had initially anticipated. This will remain a key near-term area of focus to match what we expect to be a slow demand recovery, particularly while substantial restrictions are in place (i.e. NZ's Alert Level 2). There is no shortage of challenges for SKC to navigate in the months ahead and we expect to see some battle scars, however, its asset base and long-term monopoly casino licences continue to provide comfort of value above current market pricing.

NZ Alert Levels&nbsp;— restrictions and re-opening path clearer, demand profile still the key unknown

Our base case assumes NZ&nbsp;moves to Alert Level 2 on 19 May (hence, property closure duration of eight weeks), with a step down to Alert Level 1 in early September&nbsp;— the latter is likely to be the most meaningful change for&nbsp;SKC. The re-opening path for Adelaide looks likely to be later, albeit is more challenging to predict. While&nbsp;NZ's&nbsp;Alert Level system (and signalled re-opening plans from&nbsp;SKC) provide&nbsp;a guide to what restrictions will be in place, it doesn't help us to assess customer response. We don't believe the demand profile is likely to follow the same stepped path, with a gradual improvement more likely.&nbsp;While we expect some level of pent up demand on re-opening, there is also likely to be a high level of consumer caution, particularly initially. We make small adjustments to our near-term&nbsp;EBITDA&nbsp;forecasts (-2-3%; shorter closure duration offset by greater disruption as it&nbsp;progressively re-opens).

Cash well managed to date; more clarity wanted on liquidity/funding plans

Cash opex has been well managed during the closure period, helped by deeper permanent cuts than we anticipated, while total cash burn is broadly as expected (-NZ$30–40m/month). SKC confirmed liquidity available of ~NZ$400m and indicated it does not expect to require any waivers for its 30 June 2020 debt covenants. We concur. However, the temporary EBITDA shock looks highly likely to create a challenge for covenants at 31 December 2020. Potential implications range from waiver to repayment, and will depend on discussions with each of its funding groups. SKC has liquidity to cover some repayment, however, not all. SKC may look to increase existing banking facilities and there is also a reasonable risk additional equity will be necessary to support the balance sheet.

Risk/reward still positively skewed

Despite a recent recovery, SKC's market capitalisation has still declined by ~NZ$1bn since the COVID-19 outbreak took hold in China, substantially larger than our various scenarios of the risk/cashflow impact. SKC's share price has largely tracked global casino peers through 2020, despite its greater reliance on domestic/local visitation (vs tourists), and more recently, the potential for a shorter duration of disruption in NZ from the virus (vs other countries). Recent sector transactions/M&amp;A interest also provide a reminder of the attraction of the assets (property and casino licences) which is difficult to replicate, particularly at current prices.&nbsp;




Chelsea Leadbetter CFA
chelsea.leadbetter@forsythbarr.co.nz
+64 4 495 5262




Skycity Entertainment

SKYCITY: Another Count of the Cash