Overview: SkyCity is rolling the dice with approximately $1 billion of investment over the next few years. This includes the controversial New Zealand International Convention Centre (NZICC), the associated hotel and carpark, and a major redevelopment of their Adelaide property. The Company has also allowed $50 million for “internal building works and the purchase of additional gaming product.”
Pros: The additional gaming product noted includes 230 gaming machines and 40 tables which were part of the deal made with the Crown. Along with these concessions SkyCity also received an extension to their exclusive casino license, which was due to expire in 2021, out until 2048.
This license, and similar licenses in their other locations of Adelaide, Darwin, Hamilton and Queenstown, makes SkyCity something of a monopoly, at least for local punters. The extension to the Auckland license is particularly important as this property makes up approximately 60 percent of Company revenue. Auckland is likely to become even more important as the city grows and becomes more multi-cultural.
The extra gaming tables and NZICC should allow SkyCity to build on the current momentum in the International Business (IB) sector. IB Turnover on the tables was $8.6 billion this financial year to date to, up 62 percent. Revenue generated from this turnover is up 86 percent to $64.6 million.
Cons: Clearly the NZICC deal poses risks to SkyCity. The ante has been upped by threats from the opposition suggesting they may renege on the deal, but perhaps the greatest risk is the chance of cost overruns.
Seldom do we see projects this large come in below cost. Sky City had initially budgeted $402 million for the NZICC. This has been revised up to $450-470 million, even after a slight reduction in the size of the venue. Add other capital expenditure taking place around the NZICC project and the redevelopment of the Adelaide property and SkyCity is starting to stretch itself thin.
This capital expenditure, whilst increasing risk in the short term, should deliver long term earnings increases for shareholders.
Price performance: SkyCity is up 12 percent his year after trading relatively flat the past 2 years.
Investment outlook: The expansion plans do increase the risk, but long term investors should see benefits providing we don’t get surprised with cost overruns.
*A Broker's View is written by Grant Davies, Investment Advisor at Hamilton Hindin Greene Limited. This article represents general information provided by Hamilton Hindin Greene, who may hold an interest in the security. It does not constitute investment advice. Disclosure documents are available by request and free of charge through www.hhg.co.nz.