SkyCity is about to embark on unprecedented spending as it prepares to build the New Zealand International Convention Centre and upgrade its Adelaide casino, Morningstar analyst Nachi Moghe says.
In a research note following the news on Monday that SkyCity and the Government had reached an agreement on SkyCity building the $402 million convention centre in return for gaming concessions from the Government, Mr Moghe continued his hold recommendation of the company's shares.
Mr Moghe estimated SkyCity would spend between $400 and $450 million on the convention centre. As a result, the company would spend close to $900 million over the next three to four years expanding its Adelaide casino and building the convention centre.
''This is significant and unprecedented in the history of SkyCity. At this stage, we are not changing our fair value and earnings estimates. However, we will be reviewing our projections and valuation over the next few weeks, following a detailed assessment on the project.
''All things being equal, the convention centre and the consequent regulatory relief will enhance the competitive position of SkyCity.''
The vast majority of the cost for the convention centre would be incurred in the 2015 to 2017 financial years, he said.
The company would use internal funding and existing and committed debt facilities to fund the project.
SkyCity had about $315 million of uncommitted debt facilities, along with $91 million of treasury stock.
Morningstar estimated SkyCity would generate about $370 million of free cash from 2015 to 2017 and would pay dividends of about 20c per share through the period.
Banking covenants were unlikely to be breached, Mr Moghe said.
The key risk for the company from the convention city investment would be in failing to achieve the desired increase in customer visitors to the Auckland casino.
''SkyCity is hoping an improved gaming product offering, an expanded gaming area, more cashless machines and an additional 780 car parks, stemming from the convention centre, would drive traffic through the casino.''
The convention centre was expected to cater for 183,000 delegates each year, equating to around 300,000 to 500,000 visitors a year.
That should spur traffic growth, not only to the casino gaming floor but also to SkyCity's hotels, which were already operating at high occupancy rates, restaurants and the Sky Tower, he said.
Morningstar had lifted its price target for SkyCity to $5 a share from $4.60. SkyCity last traded at $4.50.
