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>Counting the Cash</h2>
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<p><strong>OUTPERFORM</strong></p>
<p>The resilience and strength of domestic gaming has positively surprised since SKYCITY's (SKC) properties have re-opened (in some cases multiple times), leaving the balance sheet in better shape than likely anticipated. In this note we focus on cash, likely medium-term balance sheet headroom, and potential future scenarios around capital management options. The combination of (1) SKC’s material growth capex programme winding down, and (2) our expected attractive earnings growth profile, supports a growing free cash flow outlook from FY22E providing ample balance sheet optionality. SKC also offers attractive value, trading at ~15x PE and ~8x EV/EBITDA using FY23E, alongside a solid cash yield (~5%) with upside risk.&nbsp;</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/222/442/original/image_5742392121628221628110.png?1628221628" class="editor-image img-responsive" data-smartkarma-image-id="222442"></figure>
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<h3>Risks more than priced in</h3>
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<p>The Australasian casino sector has been under pressure in recent months, with the combination of Australian&nbsp;lockdowns&nbsp;and regulatory overhang adding uncertainty. This has seen&nbsp;SKC's&nbsp;share price fall&nbsp;-12% over the past two months, or ~NZ$330m in market cap. We believe this is overstated.&nbsp;Temporary closures will remain a risk for some time, however, it has been demonstrated time again that earnings rebound quickly, particularly for gaming. Both New Zealand and Adelaide's approach of short, sharp&nbsp;lockdowns&nbsp;has been successful to date, and has only seen small to modest&nbsp;impacts on group earnings. Though regulatory risk is never comfortable, we do not believe there are systemic issues at SKC. The sector-wide blitz is likely to see a further lift in standards (and cost) in this area (as has been the case in recent years) and be an overhang, however, materiality/risk to the group appears low.</p>
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<h3>Free cash flow outlook attractive, with growing earnings and a declining capex profile...</h3>
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<p>We are expecting strong earnings growth for SKC over the medium-term, underpinned by the Adelaide casino expansion, online, continued cost discipline and the eventual recovery of tourism-exposed areas. This, coupled with a declining&nbsp;capex&nbsp;profile (as major projects roll off) supports an attractive, and growing, free&nbsp;cashflow&nbsp;outlook from FY22E (FCF yield of ~3% in FY22E; ~9% in FY25E).</p>
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<h3>.... this provides a number of options over and above dividend reinstatement</h3>
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<p>SKC has signalled plans to reinstate its dividend from 2H21. We expect a conservative start with steady growth from there. Its payout ratio policy (60–90%) leaves ample scope for interpretation. It is evident the company, even at the top-end of the range, will have material excess capital available in the medium-term (from FY23E on our forecasts) which provides ample optionality.</p>
<p>We have no doubt COVID-19 and the AUSTRAC review will see conservatism in any decision on balance sheet headroom. Notwithstanding this, we forecast c. NZ$440m in feasible headroom by FY25E (range: NZ$240–630m). While SKC has a number of capital project options across its portfolio, we see nothing notable that would fit its return hurdles in the short to medium-term. This leaves capital management. We see the most likely as a share buy-back (~5% of stock is feasible in FY23E) or a series of special dividends (3.5cps+ possible from FY23E) — both of which would ensure adequate flexibility should circumstances change.</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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<div><strong>Matt Montgomerie</strong></div>
<div><a href="mailto:matt.montgomerie@forsythbarr.co.nz" target="_blank" rel="noopener">matt.montgomerie@forsythbarr.<wbr>co.nz</a></div>
<div>+64 9 368 0124</div>
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SKYCITY Counting the Cash

OUTPERFORM
The resilience and strength of domestic gaming has positively surprised since SKYCITY's (SKC) properties have re-opened (in some cases multiple times), leaving the balance sheet in better shape than likely anticipated. In this note we focus on cash, likely medium-term balance sheet headroom, and potential future scenarios around capital management options. The combination of (1) SKC’s material growth capex programme winding down, and (2) our expected attractive earnings growth profile, supports a growing free cash flow outlook from FY22E providing ample balance sheet optionality. SKC also offers attractive value, trading at ~15x PE and ~8x EV/EBITDA using FY23E, alongside a solid cash yield (~5%) with upside risk.&nbsp;


Risks more than priced in


The Australasian casino sector has been under pressure in recent months, with the combination of Australian&nbsp;lockdowns&nbsp;and regulatory overhang adding uncertainty. This has seen&nbsp;SKC's&nbsp;share price fall&nbsp;-12% over the past two months, or ~NZ$330m in market cap. We believe this is overstated.&nbsp;Temporary closures will remain a risk for some time, however, it has been demonstrated time again that earnings rebound quickly, particularly for gaming. Both New Zealand and Adelaide's approach of short, sharp&nbsp;lockdowns&nbsp;has been successful to date, and has only seen small to modest&nbsp;impacts on group earnings. Though regulatory risk is never comfortable, we do not believe there are systemic issues at SKC. The sector-wide blitz is likely to see a further lift in standards (and cost) in this area (as has been the case in recent years) and be an overhang, however, materiality/risk to the group appears low.


Free cash flow outlook attractive, with growing earnings and a declining capex profile...


We are expecting strong earnings growth for SKC over the medium-term, underpinned by the Adelaide casino expansion, online, continued cost discipline and the eventual recovery of tourism-exposed areas. This, coupled with a declining&nbsp;capex&nbsp;profile (as major projects roll off) supports an attractive, and growing, free&nbsp;cashflow&nbsp;outlook from FY22E (FCF yield of ~3% in FY22E; ~9% in FY25E).


.... this provides a number of options over and above dividend reinstatement


SKC has signalled plans to reinstate its dividend from 2H21. We expect a conservative start with steady growth from there. Its payout ratio policy (60–90%) leaves ample scope for interpretation. It is evident the company, even at the top-end of the range, will have material excess capital available in the medium-term (from FY23E on our forecasts) which provides ample optionality.
We have no doubt COVID-19 and the AUSTRAC review will see conservatism in any decision on balance sheet headroom. Notwithstanding this, we forecast c. NZ$440m in feasible headroom by FY25E (range: NZ$240–630m). While SKC has a number of capital project options across its portfolio, we see nothing notable that would fit its return hurdles in the short to medium-term. This leaves capital management. We see the most likely as a share buy-back (~5% of stock is feasible in FY23E) or a series of special dividends (3.5cps+ possible from FY23E) — both of which would ensure adequate flexibility should circumstances change.



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





Matt Montgomerie
matt.montgomerie@forsythbarr.co.nz
+64 9 368 0124



Skycity Entertainment

SKYCITY: Counting the Cash