Questions have been raised about SkyCity Entertainment Group's debt levels, due to balloon during the $700 million NZ International Convention Centre project and $A300 million Adelaide expansion.
Adrian Allbon of Deutsche Bank Equity Research has released an analysis of the business, following last week's sudden resignation of SkyCity chief executive Nigel Morrison and yesterday's investor presentation.
In that analysis, Allbon pointed to debt levels rising substantially by the 2019 financial year, due to Auckland and Adelaide.
He estimated the company's net debt could be nearly three times EBITDA by 2019, even after the sale of the planned 300-room five-star Hobson St hotel, about to be built as part of the convention centre.
That hotel is to be built at the waterfront or TVNZ end of the convention centre project.
"On our estimates, which assume external funding of the [Hobson Street] hotel, SkyCity gearing peaks in FY19 at 2.8 time net debt to EBITDA vs. its S&P BBB- threshold of three times," Allbon said.
SkyCity has indicated comfort with its debt levels and pointed to a favourable borrowing environment.
"Significantly lower funding costs due to lower interest rates, lower average debt and capitalisation of interest on projects now proceeding," it said in its half-year results briefing out in February.
The company has already indicated it is in a strong position on the debt front.
"Following the recent $125 million New Zealand bond issue, SkyCity now has ~$322m of committed undrawn bank facilities - sufficient headroom to fund the committed NZICC and Hobson St hotel projects. he proposed sale of the Hobson St hotel is progressing well, with strong interest from a broad range of domestic and international investors," the company announced.
SkyCity's business seems to be in good order but if gearing levels do get to high 'two times' levels, it doesn't give them a lot of wriggle room if activity turns down significantly.
"Based on indicative feedback received from S&P, SkyCity expects that a successful sale of the Hobson St hotel should enable it to retain its BBB- credit rating. SkyCity intends to provide a further update on its long-term funding plan following the completion of the Hobson St hotel sale process and once the plans and timing for the Adelaide expansion are further progressed," the company said then.
No sale has yet been announced.
Shane Solly of Harbour Asset Management also raised questions about debt levels.
"SkyCity's business seems to be in good order but if gearing levels do get to high 'two times' levels, it doesn't give them a lot of wriggle room if activity turns down significantly," Solly said.
Allbon also raised the issue of progress on Adelaide, where SkyCity plans a major expansion.
"The company's position on raising equity remains unchanged and is linked to the Hobson St hotel outcome and to a lesser extent Adelaide construction timing. CFO Rob Hamilton indicated the hotel process is currently taking longer than expected, but they remain confident achieving an outcome in excess of internal cost of c.NZ$160mn," Allbon's analysis said.
He also explained the background to yesterday's briefing.
"SKC held an investor call today to explain the sudden resignation of its CEO Nigel Morrison, announced last Thursday after 8-yrs in the position and effective 29 April. The board have appointed John Mortensen (NZ COO) as the interim CEO and are also undertaking a global search for a permanent placement. The Chairman confirmed on the call, Nigel's resignation is not due to a dispute at the Board level and his severance package will be consistent with his contract with a 12-month restraint of trade. At this stage, business strategy and future funding decisions remain unchanged, next update investor day mid-May. We retain our Hold rating, TP +7% to NZ$4.80," Allbon's analysis said.
Speculation SkyCity might sell its Darwin property were also quashed at the briefing.
"The chairman indicated the board remains committed to the current development strategy (NZICC and Adelaide) and the Darwin property is core to the group, unless a bid is received in excess of internal valuation. The chair also confirmed no proposal or meetings have been held with Australian casino peer Star (SGR), notwithstanding the recent press speculation," Allbon wrote.
At its interim result announcement in February, SkyCity said the convention centre would cost about $700 million.
"Total project costs, including the NZICC development, the expanded 1327 space car park, the laneway and the Hobson St hotel remain consistent with previous market guidance of ~$700m (including appropriate contingencies).
In Adelaide, SkyCity has big plans.
"SkyCity's design envisages ~80 room all-suite boutique hotel, Horizon VIP villas and suites for SkyCity's growing international business, two new signature restaurants, expanded gaming podium, allowing for the staged rollout of the additional gaming product. SkyCity is committed to a total development cost of no greater than A$300m, including the capital cost of the ground lease (~A$12m) and the commissioning of gaming product (~A$30m)," the company says.