Shareholders might be the losers from SkyCity Entertainment Group's Adelaide and Auckland $900 million expansion plans, according to an Australian analyst at research firm Morningstar.
A report out this week from Morningstar said the high dividend payouts could be jeopardised by "an unprecedented capital expenditure phase" for the two key properties.
The potential for disadvantages was high while the projects were being carried out because of the risk of cost overruns.
"Execution risks in the intervening years are considerable in terms of potential cost overruns and higher-than-expected disruptions to existing operations. This could threaten SkyCity Entertainment's current high dividend level, given the lack of free cash flow during the construction phase."
The company's pre-Christmas announcement about the Auckland international convention centre added to concerns about the sustainability of SkyCity's 85 per cent payout ratio, Morningstar said.
The report also predicted SkyCity would need to pay extra for the Auckland cost blowout. "While the quantum is not yet clear, we believe it is likely that SkyCity will need to contribute to the cost overrun over and above its original $402 million contractual obligation," it said.
"The latest development goes to the heart of our concerns regarding the risks associated with the company's ambitious capital expenditure programme. Granted, it will transform the flagship Auckland casino with the smaller Adelaide complex and potentially lead to a 60 per cent step-up in the normalised operating earnings base in five years' time.
" . Already the Adelaide operation has been hampered by disruptions from the construction activities," the report said."However, with a combined cost of $900 million, the magnitude of the two projects is not only unprecedented for SkyCity but entails material execution risks. Already the Adelaide operation has been hampered by disruptions from the construction activities," the report said.
Chris Moller, SkyCity chairman, told the company's AGM late last year about disruption from work in Adelaide, plus the high New Zealand dollar, and how that had affected performance.
However, a SkyCity spokesman said Morningstar is only one of 15 analysts that cover SkyCity and their view is not necessarily shared by the balance of analysts.
"SkyCity is not contemplating any change to our existing dividend policy following the December 19 announcement. We are committed to a policy of 20c per share, or 80 per cent of net profit after tax, whatever is higher, which we believe offers our shareholders an attractive yield and supports our underlying share price.
"We are also committed to providing $402million of funding as per the New Zealand International Convention Centre agreement and we are currently working on a solution with the Crown to bridge the funding gap. In resolving this issue we will ensure that the value of this significant and complex project is not diminished for our shareholders.
"We remain confident we can fund the Adelaide Casino and New Zealand International Convention Centre projects whilst retaining our current dividend policy."
The Morningstar report indicated such issues hit shareholders in the pocket.
"The latest news out of Auckland highlights the potential for cost overrun and delays (likely three to six months) adding to concerns about the sustainability of SkyCity's 85 per cent payout ratio (20 c dividend per share)," the report said.
SkyCity shares were steady at $3.85 yesterday.