SkyCity shares get analyst double downgrade

SkyCity convention centre and hotel looking north east along Wellesley St Auckland CBD artist's impression post-construction.

SkyCity Entertainment Group's share rating has been downgraded to sell by two different share analysts.

Deutsche Bank re-rated the stock from hold to sell, questioning aspects of the business, mainly due to its $1 billion spending programme and potential returns for shareholders.

That followed a Morningstar report predicting high dividend payouts could be jeopardised by "an unprecedented capital expenditure phase" for the key properties in Adelaide and Auckland. The potential for disadvantages was high while the projects were being carried out because of the risk of cost overruns, Morningstar said.

UBS Global Research forecast revenue to rise from $890 million in 2015 to $1.2 billion by 2019 and for earnings to share and EBIT to also rise.

A SkyCity spokeswoman said the business would not react to Deutsche's downgrade: "We never comment on analysts' views on our stock."

Craigs Investment Partners' Adrian Allbon and Deutsche Bank's Mark Wilson headlined this week's analysis 'Looking full on value' , down to sell, citing the planned NZ International Convention Centre as lifting balance sheet risk.

SkyCity was entering the execution phase of deploying a large amount of capital in the order of $1 billion to create a step-increase in earnings but investors "deserve some valuation margin of safety given the asymmetry of near term risk/reward," they said.

Yet Allbon and Wilson also said the NZICC deal remained strategically important to regenerate SkyCity's mature property "and to protect its current investment by way of exclusive licence extension to 2048."

But for shareholders, the project fully loaded the balance sheet with debt across 2016 to 2018 but only returned a weighted average cost of capital by 2023.

The Adelaide casino redevelopment represented near-term pain for longer-term gain, they said.

Marcus Curley, Sam Theodore and Rohan Sundram of UBS Global Research put a neutral investment view on SkyCity but said the shares were fully valued.

"We have trimmed our EBITDA forecasts by 2 per cent, 3 per cent and 3 per cent in 2015, 2016 and 2017 with a stronger Auckland Casino contribution more than offset by delayed benefits from major projects and a higher New Zealand dollar," they said.

They see upside from a combination of factors.

"Our analysis suggests the recent acceleration in both local gaming and non-gaming revenue growth at Auckland casino is underpinned by solid regional consumer expenditure and improving business conditions. SkyCity's international business play is also benefiting from VIP restrictions in Macau. We believe these cyclical trends are sustainable throughout 2015, helped by ongoing benefits from low interest rates, high Auckland house prices plus elevated business confidence, and we have lifted our Auckland Casino EBITDA by circa 6 per cent," they said.

The business had fundamental positives.

"We are attracted to SkyCity's strong cash generation and competitive position given the long term, monopolistic nature of its casino licenses," they said.

Mark Lister, head of private wealth research at Craigs Investment Partners, said SkyCity was previously in his firm's recommended model portfolio.

"But we removed it completely," he said, citing his October report where he wrote about its inability to grow earnings for a number of years despite significant capital investment on both sides of the Tasman, the prospect of an earnings lift being a few years away and whether the potential benefits from the NZICC justified the costs.

"That pretty much summarises our view on the stock We are reasonably lukewarm on the company and don't really see any reasons for investors to own it at the moment," Lister said.

Shares were trading yesterday on the ASX at A$3.75 and on the NZX around $4.02.