SkyCity’s development program holds significant risk: Analyst

A leading New Zealand broker has given the thumbs up to SkyCity Entertainment’s development program but noted that the company will struggle to earn more than the cost of its capital.

In a broker note released last week, Craig’s Investment Partners says there is “significant risk involved in the capital intensive program, which is expected only to deliver returns in line with the cost of capital.”

SkyCity is now well into a major capital investment program, including the $300 million redevelopments of its Adelaide hotel and casino and the construction of its $700 million convention center plus a further hotel in downtown Auckland.

It’s also looking at options for a redevelopment of its two casinos in Queenstown including a new luxury hotel – possibly without a casino operation unless licensing issues can be sorted out.

“The recent fire at the NZICC site has further delayed completion with certainty around the short term earnings impacts still to be fully recognized.” Craigs is not expecting more than a few million dollars of one-off costs but notes the impact of the fire may affect the reported result but will be immaterial to the normalized result.

“The impact on NPAT is uncertain in part due to uncertainty over the accounting treatment of the fire. [At its Adelaide investors’ day briefing] SkyCity highlighted that they may not be able to capitalize interest costs through the reinstatement period, which could impact reported NPAT.”

Craigs says to its institutional and retail clients that “SKC still has a decent period of capital intensity ahead, given this backdrop and only modest improvements in operations, it is difficult to be compelled with the investment case that SKC presents in the near term.”

SkyCity closed at NZ$4.05 yesterday down from a twelve month high of $4.13 last week but up from $3.66 this time a year ago. 

Generally, it has been trading between $3.80 and $4.00 over the last year, giving a yield of five percent on a consistent dividend of 20cps per year over the past three years.

Craigs maintains its Buy rating on SkyCity saying “the 20 cent dividend appears maintainable in our view, a cash yield of 5.1 percent.”