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<br>Checking&nbsp;the Odds</h2>
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<p><strong>OUTPERFORM</strong></p>
<p>There was nothing materially new in&nbsp;SKYCITY's&nbsp;(SKC) Annual Shareholders Meeting (ASM) trading update but it once again reiterated the significant impacts of COVID-19&nbsp;lockdowns&nbsp;in Auckland. Unsurprisingly, given the uncertainty in the current environment, no FY22 guidance was provided but we have taken the opportunity to revise our earnings estimates in light of the lingering Auckland&nbsp;lockdown. Looking through the near-term COVID-19 disruption into FY23E and beyond, we remain attracted to&nbsp;SKC's&nbsp;defensive qualities and expect domestic gaming activity to rebound strongly post-lockdowns&nbsp;(as has been the case to date). At ~15x 24 month forward PE we continue to see solid relative value against the NZ market, particularly versus defensive and large cap peers. Retain OUTPERFORM.</p>
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<h3>What's changed?&nbsp;</h3>
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<li><strong>Earnings</strong>: Material FY22E EBITDA downgrades reflecting our revised COVID-19 lockdown assumptions, minor changes to FY23E and beyond</li>
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<h3>FY22 trading update highlights the COVID impact but we expect robust activity out the other side</h3>
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<p>Limited detail was provided given COVID-19 lockdowns, but SKC reiterated prior commentary that the EBITDA impact of Auckland and Hamilton properties being closed is ~NZ$1m per day. SKC's online casino is performing "strongly" but the offset is likely to be immaterial in the context of the group. No FY22 guidance was provided but consistent with prior trends we expect a strong rebound in trading on re-opening.</p>
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<h3>Near-term balance sheet pressure but SKC was well placed heading into&nbsp;lockdowns</h3>
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<p>Helped by the resilience and strength of domestic gaming through FY21 SKC's balance sheet was in a solid position to manage extended lockdowns (available liquidity of ~NZ$305m at 30 June 2021, and gearing back within its target range). Lockdowns have created near-term pressures with covenant waivers likely required to navigate the December 2021 testing period and gearing set to be elevated at FY22E. However, notwithstanding extended lockdowns into 2H22 (we assume Auckland re-opens largely unrestricted from February) we believe SKC should have balance sheet flexibility to effectively navigate the June 2021 testing period.&nbsp;</p>
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<h3>Valuation &amp; our view</h3>
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<p>Despite near-term earnings disruption and likely elevated gearing, we expect domestic gaming activity to rebound strongly once restrictions ease.&nbsp;There is no&nbsp;change to our view that SKC should be able to return to&nbsp;FY19 (pre COVID) levels of earnings by FY23, helped by the Adelaide expansion, online contribution and structural benefits to margins due to COVID-19.&nbsp;Trading on ~11x 24 month forward EV/EBIT and ~15x 24 month forward PE we continue to see solid relative value against the NZ market.</p>
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SKYCITY Checking&nbsp;the Odds

OUTPERFORM
There was nothing materially new in&nbsp;SKYCITY's&nbsp;(SKC) Annual Shareholders Meeting (ASM) trading update but it once again reiterated the significant impacts of COVID-19&nbsp;lockdowns&nbsp;in Auckland. Unsurprisingly, given the uncertainty in the current environment, no FY22 guidance was provided but we have taken the opportunity to revise our earnings estimates in light of the lingering Auckland&nbsp;lockdown. Looking through the near-term COVID-19 disruption into FY23E and beyond, we remain attracted to&nbsp;SKC's&nbsp;defensive qualities and expect domestic gaming activity to rebound strongly post-lockdowns&nbsp;(as has been the case to date). At ~15x 24 month forward PE we continue to see solid relative value against the NZ market, particularly versus defensive and large cap peers. Retain OUTPERFORM.


What's changed?&nbsp;



Earnings: Material FY22E EBITDA downgrades reflecting our revised COVID-19 lockdown assumptions, minor changes to FY23E and beyond



FY22 trading update highlights the COVID impact but we expect robust activity out the other side


Limited detail was provided given COVID-19 lockdowns, but SKC reiterated prior commentary that the EBITDA impact of Auckland and Hamilton properties being closed is ~NZ$1m per day. SKC's online casino is performing "strongly" but the offset is likely to be immaterial in the context of the group. No FY22 guidance was provided but consistent with prior trends we expect a strong rebound in trading on re-opening.


Near-term balance sheet pressure but SKC was well placed heading into&nbsp;lockdowns


Helped by the resilience and strength of domestic gaming through FY21 SKC's balance sheet was in a solid position to manage extended lockdowns (available liquidity of ~NZ$305m at 30 June 2021, and gearing back within its target range). Lockdowns have created near-term pressures with covenant waivers likely required to navigate the December 2021 testing period and gearing set to be elevated at FY22E. However, notwithstanding extended lockdowns into 2H22 (we assume Auckland re-opens largely unrestricted from February) we believe SKC should have balance sheet flexibility to effectively navigate the June 2021 testing period.&nbsp;


Valuation &amp; our view


Despite near-term earnings disruption and likely elevated gearing, we expect domestic gaming activity to rebound strongly once restrictions ease.&nbsp;There is no&nbsp;change to our view that SKC should be able to return to&nbsp;FY19 (pre COVID) levels of earnings by FY23, helped by the Adelaide expansion, online contribution and structural benefits to margins due to COVID-19.&nbsp;Trading on ~11x 24 month forward EV/EBIT and ~15x 24 month forward PE we continue to see solid relative value against the NZ market.


Skycity Entertainment

SKYCITY: Checking the Odds