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>
Managing Cash with Leadership from the Top
OUTPERFORM
There is no playbook for managing this unprecedented situation, however, initial insights from&nbsp;SKYCITY&nbsp;(SKC) to lower cash burn appear sensible, broadly align with our thinking, and importantly, show leadership from the top. There will clearly be a large near-term earnings shock, although the extent of which is no clearer.&nbsp;SKC's&nbsp;release affirms our view that the company will make material changes to reduce&nbsp;capex/opex&nbsp;during property closure and to reflect the expected materially lower demand thereafter. We continue to believe&nbsp;SKC&nbsp;can navigate&nbsp;COVID-19 (admittedly with some battle scars), with its asset base and long-term monopoly casino licences providing comfort of value above current market pricing.
<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$1.77</td>
<td style="width: 48pt;">NPAT* (NZ$m)</td>
<td style="text-align: left; width: 40.2pt;">173.0&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">55.6</td>
<td style="text-align: left; width: 43.2pt;">62.3&nbsp;</td>
<td style="text-align: left; width: 48pt;">141.0&nbsp;</td>
<td style="width: 48pt;">EV/EBITDA</td>
<td style="text-align: left; width: 42.6pt;">4.7&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">9.1</td>
<td style="text-align: left; width: 48pt;">7.9&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">5.4&nbsp;</td>
</tr>
<tr>
<td style="width: 48pt;">Target price</td>
<td style="width: 48pt;">NZ$3.30</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;">8.3&nbsp;</td>
<td style="text-align: left; width: 43.2pt;">9.1&nbsp;</td>
<td style="text-align: left; width: 48pt;">20.2&nbsp;</td>
<td style="width: 48pt;">EV/EBIT</td>
<td style="text-align: left; width: 42.6pt;">6.4&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">17.6&nbsp;</td>
<td style="text-align: left; width: 48pt;">15.0&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">8.3&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;">-67.7</td>
<td style="text-align: left; width: 43.2pt;">9.9</td>
<td style="text-align: left; width: 48pt;">n/a</td>
<td style="width: 48pt;">PE</td>
<td style="text-align: left; width: 42.6pt;">6.9&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">21.4&nbsp;</td>
<td style="text-align: left; width: 48pt;">19.5&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">8.8&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;">10.0&nbsp;</td>
<td style="text-align: left; width: 43.2pt;">10.0&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;">3.3</td>
<td style="text-align: left; width: 42.6pt;">11.3&nbsp;</td>
<td style="text-align: left; width: 48pt;">7.0&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">7.4&nbsp;</td>
</tr>
<tr>
<td style="width: 48pt;">Market cap</td>
<td style="width: 48pt;">NZ$1,181m</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;">11.3&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">5.6&nbsp;</td>
<td style="text-align: left; width: 48pt;">5.6&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">11.3&nbsp;</td>
</tr>
<tr>
<td style="width: 48pt;">Avg daily turnover</td>
<td style="width: 48pt;">774.5k (NZ$2,701k)</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;">15.7&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">7.8</td>
<td style="text-align: left; width: 48pt;">7.8&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">15.7&nbsp;</td>
</tr>
</tbody>
</table>
First insight into steps being taken to manage cash burn both during closure and to 'right size' for lower demand on re-opening
SKC's&nbsp;release made for sombre, but not unexpected, reading with a number of cuts being made as a result of&nbsp;COVID-19 including the restructure of its management team and employee base. Changes include:
<ul type="disc">
<li>Cut to board fees: -50% reduction for the remainder of FY20.</li>
<li>Management restructure:&nbsp;Resulting in the role of Chief Property Officer being made redundant.</li>
<li>Cut to management pay to seed a hardship fund to support retrenched staff:&nbsp;Executive salary cuts of -20% to -40% for the balance of FY20, including&nbsp;-40%&nbsp;for the&nbsp;CEO,&nbsp;CFO&nbsp;and COO, to seed&nbsp;an employee hardship fund of&nbsp;~NZ$1m for those facing redundancy.</li>
<li>Non-essential&nbsp;opex&nbsp;and&nbsp;capex&nbsp;cut.&nbsp;In terms of its major projects&nbsp;— construction has been halted in Auckland&nbsp;(not permitted until NZ moves back to 'Level 2'&nbsp;COVID&nbsp;alert level), while deemed essential in Adelaide hence construction continues (at least for now).</li>
<li>Staff cuts:&nbsp;A reduction in salaried employees (~200) and&nbsp;cuts for waged employees in NZ, while ~90% of its Adelaide workforce has been stood down (consistent with Australian peers). Government subsidies will help cushion some of the impact initially.​​​​​​​SKC&nbsp;has signalled annualised&nbsp;cost savings of up to NZ$50m,&nbsp;a reduction of up to 20%.​​​​​​​</li>
</ul>
Too early to recalibrate forecasts; no change to our thought process
There will clearly be a large near-term earnings shock, due to the mandated closure period, followed by disruption ('social distancing') and lower demand from a likely economic downturn thereafter. Acknowledging significant limitations in any near-term forecast in the current environment, our target price and forecasts already factor in 10 weeks of closure for all its properties, border closure through CY20 and material disruption in 1H21. SKC's release aligns with our view costs will be more flexible than usual (helped by government subsidies), although signalled permanent cuts are deeper than we anticipated.&nbsp;
Fundamentally SKC is a strong business, predominantly exposed to the domestic consumer, with significant property assets (~NZ$2bn) and long-term monopoly casino licences. While we acknowledge material near-term risks, the share price correction seems out of step with any magnitude of scenarios around the risk. To add context, the ~NZ$2.30 share price decline compares to our estimated casino closure cost of ~NZ$0.04–0.06/month (total cash burn including capex of NZ$30–40m/month). See our recent report Recalibrating For Shutdown on 26 March for more detail.​​​​​​​​​​​​​​
Chelsea Leadbetter CFA chelsea.leadbetter@forsythbarr.co.nz +64 4 495 5262

SKYCITY
Managing Cash with Leadership from the Top
OUTPERFORM
There is no playbook for managing this unprecedented situation, however, initial insights from&nbsp;SKYCITY&nbsp;(SKC) to lower cash burn appear sensible, broadly align with our thinking, and importantly, show leadership from the top. There will clearly be a large near-term earnings shock, although the extent of which is no clearer.&nbsp;SKC's&nbsp;release affirms our view that the company will make material changes to reduce&nbsp;capex/opex&nbsp;during property closure and to reflect the expected materially lower demand thereafter. We continue to believe&nbsp;SKC&nbsp;can navigate&nbsp;COVID-19 (admittedly with some battle scars), with its asset base and long-term monopoly casino licences providing comfort of value above current market pricing.
         


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


Share price
NZ$1.77
NPAT* (NZ$m)
173.0&nbsp;
55.6
62.3&nbsp;
141.0&nbsp;
EV/EBITDA
4.7&nbsp;
9.1
7.9&nbsp;
5.4&nbsp;


Target price
NZ$3.30
EPS* (NZc)
25.6&nbsp;
8.3&nbsp;
9.1&nbsp;
20.2&nbsp;
EV/EBIT
6.4&nbsp;
17.6&nbsp;
15.0&nbsp;
8.3&nbsp;


Risk rating
Medium
EPS growth* (%)
0.9
-67.7
9.9
n/a
PE
6.9&nbsp;
21.4&nbsp;
19.5&nbsp;
8.8&nbsp;


Issued shares
667.2m
DPS (NZc)
20.0&nbsp;
10.0&nbsp;
10.0&nbsp;
20.0&nbsp;
Price/NTA
3.3
11.3&nbsp;
7.0&nbsp;
7.4&nbsp;


Market cap
NZ$1,181m
Imputation (%)
100
100
100
100
Cash div yld (%)
11.3&nbsp;
5.6&nbsp;
5.6&nbsp;
11.3&nbsp;


Avg daily turnover
774.5k (NZ$2,701k)
*Based on normalised profits


Gross div yld (%)
15.7&nbsp;
7.8
7.8&nbsp;
15.7&nbsp;



First insight into steps being taken to manage cash burn both during closure and to 'right size' for lower demand on re-opening
SKC's&nbsp;release made for sombre, but not unexpected, reading with a number of cuts being made as a result of&nbsp;COVID-19 including the restructure of its management team and employee base. Changes include:

Cut to board fees: -50% reduction for the remainder of FY20.
Management restructure:&nbsp;Resulting in the role of Chief Property Officer being made redundant.
Cut to management pay to seed a hardship fund to support retrenched staff:&nbsp;Executive salary cuts of -20% to -40% for the balance of FY20, including&nbsp;-40%&nbsp;for the&nbsp;CEO,&nbsp;CFO&nbsp;and COO, to seed&nbsp;an employee hardship fund of&nbsp;~NZ$1m for those facing redundancy.
Non-essential&nbsp;opex&nbsp;and&nbsp;capex&nbsp;cut.&nbsp;In terms of its major projects&nbsp;— construction has been halted in Auckland&nbsp;(not permitted until NZ moves back to 'Level 2'&nbsp;COVID&nbsp;alert level), while deemed essential in Adelaide hence construction continues (at least for now).
Staff cuts:&nbsp;A reduction in salaried employees (~200) and&nbsp;cuts for waged employees in NZ, while ~90% of its Adelaide workforce has been stood down (consistent with Australian peers). Government subsidies will help cushion some of the impact initially.​​​​​​​SKC&nbsp;has signalled annualised&nbsp;cost savings of up to NZ$50m,&nbsp;a reduction of up to 20%.​​​​​​​

Too early to recalibrate forecasts; no change to our thought process
There will clearly be a large near-term earnings shock, due to the mandated closure period, followed by disruption ('social distancing') and lower demand from a likely economic downturn thereafter. Acknowledging significant limitations in any near-term forecast in the current environment, our target price and forecasts already factor in 10 weeks of closure for all its properties, border closure through CY20 and material disruption in 1H21. SKC's release aligns with our view costs will be more flexible than usual (helped by government subsidies), although signalled permanent cuts are deeper than we anticipated.&nbsp;
Fundamentally SKC is a strong business, predominantly exposed to the domestic consumer, with significant property assets (~NZ$2bn) and long-term monopoly casino licences. While we acknowledge material near-term risks, the share price correction seems out of step with any magnitude of scenarios around the risk. To add context, the ~NZ$2.30 share price decline compares to our estimated casino closure cost of ~NZ$0.04–0.06/month (total cash burn including capex of NZ$30–40m/month). See our recent report Recalibrating For Shutdown on 26 March for more detail.​​​​​​​​​​​​​​
Chelsea Leadbetter CFA chelsea.leadbetter@forsythbarr.co.nz +64 4 495 5262

SKYCITY: Managing Cash with Leadership from the Top

Skycity Entertainment

SKYCITY: Managing Cash with Leadership from the Top