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>Assessing Closure Risk</strong></p>
<p><strong>OUTPERFORM</strong></p>
<p>SKYCITY's (SKC) market capitalisation has fallen by ~NZ$1.2bn since the COVID-19 outbreak took hold in China, substantially larger than our various scenarios of the risk/cashflow impact. ​​​​​​​We acknowledge newsflow likely gets worse before it gets better (including the possibility of a temporary closure). However, we expect a recovery in gaming spend from any shock and there is no change to its attractive asset base with monopoly long-term casino licences. To put it another way, the NZ$1.85 decline in SKC's share price compares to our estimated casino closure cost of ~NZ$0.07/month. &nbsp;​​​​</p>
<table class="table table-striped"><colgroup><col> <col> <col> <col> <col> <col> <col span="2"> <col span="2"> <col> <col></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: 40.2pt;">19A</td>
<td style="width: 42.6pt;">20E</td>
<td style="width: 43.2pt;">21E</td>
<td style="width: 48pt;">22E</td>
<td style="width: 48pt;">Valuation (x)</td>
<td style="width: 42.6pt;">19A</td>
<td style="width: 42.6pt;">20E</td>
<td style="width: 48pt;">21E</td>
<td style="width: 42.6pt;">22E</td>
</tr>
<tr>
<td style="width: 48pt;">Share price</td>
<td style="width: 48pt;">NZ$2.18</td>
<td style="width: 48pt;">NPAT* (NZ$m)</td>
<td style="text-align: left; width: 40.2pt;">173.0&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">82.4</td>
<td style="text-align: left; width: 43.2pt;">104.2&nbsp;</td>
<td style="text-align: left; width: 48pt;">148.2&nbsp;</td>
<td style="width: 48pt;">EV/EBITDA</td>
<td style="text-align: left; width: 42.6pt;">5.5&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">8.8</td>
<td style="text-align: left; width: 48pt;">7.4&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">6.2&nbsp;</td>
</tr>
<tr>
<td style="width: 48pt;">Target price</td>
<td style="width: 48pt;">NZ$3.65</td>
<td style="width: 48pt;">EPS* (NZc)</td>
<td style="text-align: left; width: 40.2pt;">25.6&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">12.2&nbsp;</td>
<td style="text-align: left; width: 43.2pt;">15.2&nbsp;</td>
<td style="text-align: left; width: 48pt;">21.2&nbsp;</td>
<td style="width: 48pt;">EV/EBIT</td>
<td style="text-align: left; width: 42.6pt;">7.4&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">14.7&nbsp;</td>
<td style="text-align: left; width: 48pt;">11.7&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">9.2&nbsp;</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: 40.2pt;">0.9</td>
<td style="text-align: left; width: 42.6pt;">-52.2</td>
<td style="text-align: left; width: 43.2pt;">24.1</td>
<td style="text-align: left; width: 48pt;">39.6&nbsp;</td>
<td style="width: 48pt;">PE</td>
<td style="text-align: left; width: 42.6pt;">8.5&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">17.8&nbsp;</td>
<td style="text-align: left; width: 48pt;">14.4&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">10.3&nbsp;</td>
</tr>
<tr>
<td style="width: 48pt;">Issued shares</td>
<td style="width: 48pt;">667.2m</td>
<td style="width: 48pt;">DPS (NZc)</td>
<td style="text-align: left; width: 40.2pt;">20.0&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">15.0&nbsp;</td>
<td style="text-align: left; width: 43.2pt;">15.0&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: 42.6pt;">4.1&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">11.3&nbsp;</td>
<td style="text-align: left; width: 48pt;">6.3&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">6.3&nbsp;</td>
</tr>
<tr>
<td style="width: 48pt;">Market cap</td>
<td style="width: 48pt;">NZ$1,454m</td>
<td style="width: 48pt;">Imputation (%)</td>
<td style="text-align: left; width: 40.2pt;">100</td>
<td style="text-align: left; width: 42.6pt;">100</td>
<td style="text-align: left; width: 43.2pt;">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: 42.6pt;">9.2</td>
<td style="text-align: left; width: 42.6pt;">6.9</td>
<td style="text-align: left; width: 48pt;">6.9&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">9.2&nbsp;</td>
</tr>
<tr>
<td style="width: 48pt;">Avg daily turnover</td>
<td style="width: 48pt;">687.1k (NZ$2,588k)</td>
<td colspan="3" style="width: 130.8pt;">*Based on normalised profits</td>
<td style="width: 43.2pt;"></td>
<td style="width: 48pt;"></td>
<td style="width: 48pt;">Gross div yld (%)</td>
<td style="text-align: left; width: 42.6pt;">12.7</td>
<td style="text-align: left; width: 42.6pt;">9.6</td>
<td style="text-align: left; width: 48pt;">9.6&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">12.7&nbsp;</td>
</tr>
</tbody>
</table>
<p><strong>Rapid deterioration in the backdrop in recent weeks/days</strong></p>
<p>Our on-the-ground observations over the past week suggest visitation appears to still be healthy ("perhaps a small dent") at&nbsp;SKYCITY&nbsp;Auckland. However, with increasing 'social distancing' protocols we do now expect to see an impact on&nbsp;consumer activity levels, including casino visitation. Temporary casino closure is also now a real risk, in our view.</p>
<p><strong>Assessing closure risk; taking a 'stab' at the short-term impact in forecasts (acknowledging high margin of error)</strong></p>
<p>Under a 'worst case' temporary closure&nbsp;(i.e. no revenue or offsets) we estimate cash burn of c. NZ$48m/month. We assess balance sheet capacity could withstand a 6 month closure, although&nbsp;USPP&nbsp;debt (~NZ$341m) adds risk if closure wasn't looked through. We incorporate a period of disruption in our near-term forecasts (2m closure +&nbsp;3m pressure) and temporary dividend reduction. We are&nbsp;likely to be wrong given the&nbsp;high margin of error but see it is as prudent to incorporate the risk. We also expect there are offsets&nbsp; we haven't incorporated. We view any disruption as temporary and believe&nbsp;SKC's&nbsp;material de-rate more than compensates for risks.</p>
<p><strong>Chelsea Leadbetter CFA</strong><br>chelsea.leadbetter@forsythbarr.co.nz<br>+64 4 495 5262</p>

SKYCITY
Assessing Closure Risk
OUTPERFORM
SKYCITY's (SKC) market capitalisation has fallen by ~NZ$1.2bn since the COVID-19 outbreak took hold in China, substantially larger than our various scenarios of the risk/cashflow impact. ​​​​​​​We acknowledge newsflow likely gets worse before it gets better (including the possibility of a temporary closure). However, we expect a recovery in gaming spend from any shock and there is no change to its attractive asset base with monopoly long-term casino licences. To put it another way, the NZ$1.85 decline in SKC's share price compares to our estimated casino closure cost of ~NZ$0.07/month. &nbsp;​​​​
         


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


Share price
NZ$2.18
NPAT* (NZ$m)
173.0&nbsp;
82.4
104.2&nbsp;
148.2&nbsp;
EV/EBITDA
5.5&nbsp;
8.8
7.4&nbsp;
6.2&nbsp;


Target price
NZ$3.65
EPS* (NZc)
25.6&nbsp;
12.2&nbsp;
15.2&nbsp;
21.2&nbsp;
EV/EBIT
7.4&nbsp;
14.7&nbsp;
11.7&nbsp;
9.2&nbsp;


Risk rating
Medium
EPS growth* (%)
0.9
-52.2
24.1
39.6&nbsp;
PE
8.5&nbsp;
17.8&nbsp;
14.4&nbsp;
10.3&nbsp;


Issued shares
667.2m
DPS (NZc)
20.0&nbsp;
15.0&nbsp;
15.0&nbsp;
20.0&nbsp;
Price/NTA
4.1&nbsp;
11.3&nbsp;
6.3&nbsp;
6.3&nbsp;


Market cap
NZ$1,454m
Imputation (%)
100
100
100
100
Cash div yld (%)
9.2
6.9
6.9&nbsp;
9.2&nbsp;


Avg daily turnover
687.1k (NZ$2,588k)
*Based on normalised profits


Gross div yld (%)
12.7
9.6
9.6&nbsp;
12.7&nbsp;



Rapid deterioration in the backdrop in recent weeks/days
Our on-the-ground observations over the past week suggest visitation appears to still be healthy ("perhaps a small dent") at&nbsp;SKYCITY&nbsp;Auckland. However, with increasing 'social distancing' protocols we do now expect to see an impact on&nbsp;consumer activity levels, including casino visitation. Temporary casino closure is also now a real risk, in our view.
Assessing closure risk; taking a 'stab' at the short-term impact in forecasts (acknowledging high margin of error)
Under a 'worst case' temporary closure&nbsp;(i.e. no revenue or offsets) we estimate cash burn of c. NZ$48m/month. We assess balance sheet capacity could withstand a 6 month closure, although&nbsp;USPP&nbsp;debt (~NZ$341m) adds risk if closure wasn't looked through. We incorporate a period of disruption in our near-term forecasts (2m closure +&nbsp;3m pressure) and temporary dividend reduction. We are&nbsp;likely to be wrong given the&nbsp;high margin of error but see it is as prudent to incorporate the risk. We also expect there are offsets&nbsp; we haven't incorporated. We view any disruption as temporary and believe&nbsp;SKC's&nbsp;material de-rate more than compensates for risks.
Chelsea Leadbetter CFA chelsea.leadbetter@forsythbarr.co.nz +64 4 495 5262

Skycity Entertainment

SKYCITY: Assessing Closure Risk