Lockdown unlucky: SkyCity earnings forecast downgraded by $55m in new research

Extended lockdowns have meant SkyCity Entertainment Group’s full-year operating earnings, previously expected of $261 million, have now forecast back to just $206m – a $55m hit.

Adrian Allbon, a Jarden Securities analyst, has released a new update on the casino, restaurant, gaming and hotel business, saying initial outlooks for how long its Auckland and Hamilton properties would be shut had forecast much shorter times.

But now it was clear the lockdowns were going to be so much longer, he sliced EBITDA forecasts by a savage $55m or 21 per cent.

SkyCity could not comment on the research today because its AGM is too close, held later this month.

In late August when SkyCity released its full-year 2021 result, Allbon said Jarden assumed four to six-week alert level 3 and 4 lockdowns.

Back then, it had forecast far higher operating earnings.

“Our estimate of the FY22 EBITDA dent now deepens, to $206m,” Allbon said.

Michael Ahearne, SkyCity chief executive, has previously told the Herald that for every day its Auckland properties remain shut, the company loses more than $1m.

“The difference between us being open and closed is over $1 million a day,” said the chief on August 30 of the reality of the hard lockdown for one company employing 2500 people.

Allbon says the lockdowns had been far longer than initially anticipated. He doesn’t now expect any change to the city’s alert level 3 throughout this month.

“We now expect level 3-like restrictions to prevail in Auckland over the rest of October with progressive reopening potential in November and level 2-like conditions from December,” his research said.

Earnings from Auckland were expected to be $209m for the year to June 30, 2022. Allbon has revised that down to $158.8m.

Hamilton earnings were expected to be $33.6m. That’s now cut to $29.5m.

The company had been holding around $100m of EBITDA as a buffer but Allbon questioned whether that was still the case. He wonders too if the company is talking to its bankers.

“With an extended New Zealand lockdown now a reality, our revised FY22 estimate suggests this buffer is now mostly consumed and we would expect management to be working with the company’s debt providers on waiver flexibility,” Allbon said.

On October 3, SkyCity said it would close its Hamilton casino following the Government announcement on the Waikato.

SkyCity Auckland has been closed since August. Only the company’s Queenstown casino remains open in New Zealand.

“SkyCity’s businesses outside of New Zealand – SkyCity Adelaide and SkyCity online casino – are unaffected by the latest restrictions in New Zealand. SkyCity Adelaide remains open with physical distancing and hygiene requirements already in place,” the company said.

But Adelaide has been closed in South Australia lockdowns before New Zealand ushered in the latest lockdowns.

Hamilton and Queenstown were previously shut for weeks as well. SkyCity only re-opened there on September 8 after some of this country’s alert levels were relaxed.

The company’s annual meeting is at 1pm, Friday, October 29. Whether an update on the trading year and the lockdown’s effects will be given there is unknown.

In somewhat of a longer-term bright spot, Allbon forecast international business’s loss of $1.8m to turn into a profit next year and rise to $7.7m by 2023 and then $15.8m by 2024.

International business was once a huge earner for SkyCity, as customers particularly from Asia flew into Auckland and then travelled south.

In 2015, the Herald reported how overseas gamers hitting New Zealand boosted SkyCity’s international business and was one of the main reasons for its huge profit surge and it cited Asian VIPs. It seems the high-roller effect has pushed the business up. “Strong growth in group-wide IB”, was SkyCity’s shorthand for that trend.

At the time, then-SkyCity chief executive Nigel Morrison attributed a 30.7 per cent net profit after tax lift to an improved win rate in international business of 1.36 per cent compared with 0.97 per cent last year.

The international business delivered record activity in 2015, with turnover increasing to $9.3b and normalised earnings before interest, tax, depreciation and amortisation (ebitda) up 35.1 per cent to $26.4m, SkyCity said back then.

Revenue for the June 30, 2015 year then cracked the billion-dollar barrier – $1.009 billion, compared with 2014’s $902.5m.

Morningstar says SkyCity is a high-quality cash-generating business involved in “unrelenting reinvestment” which has given it strong positions with sole casino operational licences in the areas where it does business.

After the company’s full-year result came out in August, Forsyth Barr analysts Chelsea Leadbetter and Matt Montgomerie cited Covid and associated restrictions as continuing to be an overhang.

“However, recent history reinforces the business bounces back quickly. Looking beyond this, a balance sheet in good shape and growing free cashflow profile supports an attractive yield, with ample balance sheet headroom providing further optionality,” they said on August 26.

SkyCity today has a market capitalisation of $2.4b. Shares are trading around $3.10, up 2 per cent annually. But they were $4.10 last March before the pandemic and lockdowns hit New Zealand.

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