Upside in Sky City Entertainment is mainly driven by the potential for a significant jump in earnings over the next three years. Combining stronger economic growth in Auckland and benefits from a National Convention Centre, net profit after tax could be significantly higher in FY2014 than the market currently expects.
This is initially driven by a strong cyclical recovery in Auckland economic activity and gaming play at Auckland casino. Auckland household consumption growth should be well above the nationwide average of around 1%, driven by the region’s greater sensitivity to loose financial conditions and a looming house shortage. Around 50% of seats for all Rugby World Cup games are also based in Auckland, spread evenly through September and October.
In addition, the positive Auckland economic backdrop creates the possibility for a sharper than expected recovery in table play, which unusually underperformed machine revenue during CY10. This possibility is significantly enhanced by the opening of the new VIP gaming facilities at Auckland Casino in late August.
Sky City is in exclusive negotiations with the Government to build a large convention centre on its site at Hobson Street, Auckland. This should include highly valuable regulatory concessions for Auckland Casino, including, greater machine and table numbers; greater availability of ticket-in/ticket-out and a lift in note acceptors limit; and the ability to advertise jackpots. The project should provide a material boost to the long-term earnings, supported by Sky City’s strong balance sheet allowing it to debt fund the capital expenditure. Earnings accretion should be higher in the initial two years with upfront benefits from regulatory relief.
Against this earnings growth potential, Sky City’s valuation remains attractive trading at a Price Earnings discount to Australian casino peers of around 20%. In addition, regulatory concession, especially an extension of the venue licence period, would reduce potential obstacles to industry consolidation. The average transaction EV/EBITDA multiple paid for casino companies in Australasia is 10x, versus Sky City around 8x.
Mark Warminger