SKYCITY CEO sees bright future; analysts unexcited

Friday 10th of August 2018

SKYCITY Entertainment CEO Graeme Stephens is optimistic about the group’s prospects, helped by expansion in Auckland, a planned venture into online gaming and a rebound in international VIPs, although analysts remain cautious.

New Zealand’s only listed operator this week posted record profit of NZ$170 million ($113 million) for the 2017/18 financial year. The company improved its operational performance at all its properties, with a 39 percent jump in international business to $11.9 billion ($7.9 billion).

Stephens said he was “really pleased” with the result, which was a record for the company both in terms of operating earnings and net profit. He told AGB that the result was probably a bit better than either the market or the company had expected.

“I’m particularly encouraged by both the strong rebound in our international business and a return to earnings growth in Adelaide and Darwin on a like-for-like basis.”

Karl Williscroft, an analyst at Craigs’ Investment Partners said the results were solid and “well-received” by the market, with the share price moving higher.

He said the results were driven by a good last quarter from the international business, but also a stronger than expected showing from Auckland and Adelaide electronic gaming machines, and a good second half performance in Hamilton and Queenstown.

Despite the strong results, SKYCITY doesn’t appear to have won over market analysts.

Some have questioned the company’s reliance on casino and hotel operations in Auckland, with Craigs’ writing in a research note earlier this month, that “other than good international business performance there appears to be few catalysts (to growth) in the medium term. We think the market will want evidence of project upside before these are factored into the share price.”

Stephens rebuts this assessment saying that analysts typically had a short term focus aimed at driving sales while the company was clearly focused on the creation of medium and long-term value.

“I'd point to the long term nature of our licences and exclusivity, which make us a stock which has significant downside protection. Our shareholders would prefer us not to risk this in pursuit of short term upside.”

The company regards both the opening of the NZ International Convention Centre in Auckland in early 2020 and the completion of the Adelaide Casino expansion later that same year as two medium-term catalysts for the growth of the company.

“In terms of the immediate future, I'd say SKYCITY offers modest growth and relative share price stability with a good dividend in an industry that can still be expected to grow.”

He told AGB that “the hotel sector offers good opportunities for the company to incrementally grow its earnings within Australasia and I've made it clear SKYCITY is interested in partnering with others in this area to expand the properties we have not just in Auckland, but in Hamilton, Queenstown, and Adelaide as well.

“We're also working on a number of non-gaming, family-friendly entertainment opportunities on Federal Street in Auckland, which will expand our appeal and diversify our revenue base, and I should have more to say about those in the coming months.''

The Darwin business is up for sale and the company has received indicative bids above book value. “A couple of companies have been through and done their due diligence, Stephens said. He wouldn’t give numbers except to say that there were more than two bidders involved.

He said he was relaxed about “whether or not we sell the Darwin property.”

“I've always said it would have to be to the right bidder at the right price. This is certainly not a crisis sale - Darwin remains a quality, cash-generative operation for SKYCITY and if the sale doesn't happen then I'm entirely comfortable with that.

“But we're still going through the process, although I can honestly say I don't know how it will turn out, we should have an answer within the next two months.''

Excluding international business, Auckland’s casino accounts for 90 percent of the casino EBITDA, earning $261 million of the total $289 million across the group.

Profits from the other five licences held by the group in Hamilton, Queenstown (two licences), Adelaide and Darwin are miniscule, although all the licences improved earnings apart from Darwin, which was affected by having three Keno 10 jackpots in the year compared with none the previous year.

Other factors considered important are that there have been significant changes at both the board and management level. The two parties now seem to be in greater accord, and the group strategy has been “refreshed”, and new in-house initiatives adopted.

The “capital lighter” approach is one example. The car park in Auckland’s Federal Street has been sold: the company is looking to sell more car parks in Auckland and around its Adelaide operation.

The two casinos in Queenstown will be upgraded to enhance the visitor experience, and a contract has been let for the redevelopment of the Adelaide hotel and casino with 90 percent of the $330 million investment being covered by a fixed price contract.

Among other changes are a much stronger emphasis on corporate social responsibility, what Stephens calls its “social licence” to operate, and on environmental issues and people and culture.

"SKYCITY is moving to integrate the reporting of our non-financial goals into our annual report so we can make it clear to our communities just what our aims are and so they can mark us accordingly on our performance.

“Recent highlights for me would include our recent decision to sign the Climate Coalition's pledge to reduce our carbon emissions in line with the Paris Agreement, becoming a principal sponsor of Global Women, and our pledge to pay our staff at least $20 an hour by 2020.''

The company is also looking at diversifying into online gambling with Stephens saying an online gaming strategy was a logical extension of its land-based casino operations.

“Online delivery of goods and services is increasingly the norm and (we are aware) offshore online casinos were offering gaming to New Zealand customers.

The company has also bought an interest in Let’s Play Live Media, New Zealand’s leading broadcaster and operator of e-sports and is looking at other interactive entertainment possibilities for its Auckland site.

Despite the company’s upbeat presentation Craigs notes that while the New Zealand International Convention Centre is strategically important for the company to re-generate its mature portfolio, “there is significant risk involved in the four-year capital-intensive programme, which is expected to deliver returns only in line with its cost of capital.”

SKYCITY itself noted in its trading update in May that it was “difficult to sustain above the cost of capital returns due to the ongoing requirement to invest to retain the social licence to operate.”

Describing the company’s prospects as “hard to get excited” Craigs said; “More recently, SKYCITY has provided a reasonably upbeat outlook of its prospects, although the company does acknowledge that history has created a credibility gap that needs to be addressed.”

Stephens told AGB that the new strategic approach shared by the board and management has “absolutely made a difference to our non-financial results, and over time it will be reflected in the company's overall performance.

“The board, my senior management team and I are committed to social responsibility as one of the key pillars of our new group strategy, and we are well aware that we must maximise returns for shareholders in a sustainable manner.”