Gambling on long term

SkyCity Casino is set to invest large without assurances of cross-party support for some...
SkyCity Casino is set to invest large without assurances of cross-party support for some ambitions. Photo by the New Zealand Herald.
Lean times appear to be ahead for casino and tourism operator SkyCity Entertainment as its embarks on its $500 million Adelaide redevelopment, but which in the long term could underpin large gains.

Still hanging over SkyCity is its controversial deal with the Government to spend more than $350 million on a conference centre, in return for boosting casino table numbers, a deal without cross-party political support.

Of increasing concern to analysts is the strength of the New Zealand dollar against its Australian counterpart, which is prompting outlook revisions.

Craigs Investment Partners broker Peter McIntyre said SkyCity continues to face an environment, in both New Zealand and Australia, which ''is not conductive to earnings growth''.

''Despite signs and prospects of an improving economic outlook in New Zealand, trading performance remains patchy at the key Auckland property, while no such benefits are evident at [casinos in] Hamilton or Adelaide,'' Mr McIntyre said.

SkyCity is due to report its first-half trading result today, having in October reported to shareholders modest revenue growth in New Zealand and a flat result out of Australia.

SkyCity financial guidance in December was for a decline in first-half after-tax profit, from $72 million a year ago to a range of $65 million-$68 million.

For its full-year trading, Craigs is estimating a decline in earnings before interest, tax, depreciation and amortisation (Ebitda) from $303 million a year ago to $299 million, while Forsyth Barr predicts first-half revenue will be down from $450 million in first-half 2013 to $415.7 million, with net profit down from $72.1 million to $66 million.

Forsyth Barr broker Suzanne Kinnaird said she expected a ''soft'' first-half result because of ''subdued'' operating conditions, the impact of the high kiwi dollar when exchanging Australian-dollar earnings and the overall ''mature'' gaming markets.

''Current trading in New Zealand will be of interest given the improving economic conditions,'' she said.

Mr McIntyre said the kiwi dollar strength was a ''significant headwind'' for SkyCity during 2014, and had recently had to review the earlier forecast A85c cross rate up further.

Ms Kinnaird said following SkyCity guidance that profit would be well down on a year ago, she estimated there might be a $3 million negative impact because of the strength of the kiwi dollar.

She said key issues this year included signs of growth in Auckland, regular updates on capital expenditure on the projects and SkyCity's outlook for second-half trading.

Mr McIntyre said the Adelaide development would have a significant effect on the property and would be a ''key driver'' of anticipated earnings growth over the long term; noting the addition of car parks in Adelaide was ''critical'', but was still outside SkyCity's control.

Adelaide's redevelopment would introduce much-needed growth, considering the capital expenditure required for Auckland and Adelaide, with gains only beginning from redevelopment completion in 2017.

At that point Mr McIntyre expected Adelaide revenue to have increased from the present $A150 million to more than $350 million, with Ebitda correspondingly up from $A40 million to $A100 million.

He was ''increasingly cautious'' about adding value into SkyCity from the proposed more than $350 million conference centre at Auckland as the ''rhetoric'' of the opposition parties remained ''cause for concern''.

''It's a deal reliant on the full suite of regulatory reforms to provide a return,'' Mr McIntyre

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