The ultimate success of its plan to improve returns relied on new initiatives and was unlikely to be realised or evident until the two major projects were completed, in the 2021 financial year at best.The two projects are the New Zealand Convention Centre and the upgrade of the Adelaide Casino.
Forsyth Barr broker Suzanne Kinnaird said there was nothing at the investor day to change her view of the company.
"We see opportunities for new management to improve returns, albeit questions remain on how much of this may be eroded by investment back into the business.
"We see the risk/reward as balanced and maintain a neutral rating."
There were several key messages from the investor day, she said.
• Asset shuffling: There were options for releasing capital through non-core assets, including car parks, hotels and the Darwin casino, the primary rationale being to release capital to reinvest somewhere else, particularly Auckland.
• Cost shuffling: SkyCity continued to signal opportunities for optimisation across its casino properties, although no specifics were provided at the investment day. Operating profits might be constrained by higher investment in corporate costs and higher wages in the medium-term.
• Returns in the spotlight: The primary focus was clear — improving returns, with a message of "thinking smarter" and working assets harder, rather than investing significantly more capital.
SkyCity disclosed a target minimum post-tax internal rate of return target for all growth projects of 12%, with emphasis the target included the Adelaide project.
Ms Kinnaird said a material lift in operating earnings was required from Adelaide following its completion.
• Greater focus on international business: International business was a focus area for growth, with a target to reach up to 15% of group operating profit from about 8% in the 2018 first-half result. International business was a highly competitive and volatile market and Forsyth Barr had more cautious forecasts on the medium to longer-term.
• First insight into the wider management team: Following significant change across the board, the company highlighted the depth of experience in the gaming/entertainment sector. Early signs and signals were encouraging.
The other area of discussion included SkyCity’s property assets, Ms Kinnaird said.
• Queenstown: Queenstown was a favourable destination for premium gaming players to add to a New Zealand trip. However, the current product offering and facilities were well below par and needed investment. The set-up of two separate licences was not efficient but rectifying the situation would require legislation change.
Forsyth Barr expected a plan to be made before the current leases ended in 2019-20, moving out to 2024-25.
• Auckland: The company referenced a "master plan" for the key Auckland precinct and an emphasis on becoming more of an entertainment destination. Additional property acquisitions were largely complete and partners were likely to be required for any major additional capital expenditure to build out the precinct.
Ms Kinnaird expected an emphasis on growing complementary non-gaming, alongside improving flow between the key pieces of the precinct. The City Rail Link was due for completion in 2023 and she expected completing the precinct would be a priority for SkyCity.
• Adelaide: The tender process for the construction contract had taken longer than anticipated. A contract needed to be signed before capital requirement risks could be fully dismissed.
• Darwin: SkyCity was "testing the water" about the potential sale of the Darwin Casino. Two hurdles needed to be passed: appropriate price; and regulator sign-off, thought to be a challenge. Darwin was cash flow positive, so optimising costs and not investing any material capital into the property might be the better option, she said.
• Hamilton: Hamilton was seen as the key property which could deliver value to shareholders from greater investment. Regulation constrained gaming supply in Hamilton to match demand. Changing would require regularity change. There was also potential to look at additional complementary non-gaming opportunities.
SkyCity also hosted an accounting session — the most anticipated of the day — to detail the implications of its major projects on its balance sheet.There were no implications for the cash flow, she said.
SkyCity’s return profile following the projects would benefit from the accounting treatment.
Earnings from the convention centre and Hobson St hotel project were unlikely to be sufficient to offset higher depreciation and interest expense following project completion in 2020.
The improvement in Adelaide’s earnings before interest, tax, depreciation and amortisation (ebitda) was expected to meet or exceed higher depreciation and interest expense.
