Solid financial performance for SkyCity in FY19

SkyCity Entertainment Group Limited (NZX/ASX:SKC) today announced an increase in normalised net profit and earnings for the second consecutive year, despite a more challenging operating environment during FY19.

Key features of FY19

Commenting on the results, Chief Executive Graeme Stephens says he is pleased with where SkyCity finished FY19, which was a positive year for the company despite a backdrop of a more challenging operating environment and some increased cost pressures across the business.

“SkyCity completed the financial year continuing the positive momentum we’ve managed to build over the last couple of years and our operating results were slightly ahead of expectations. When you adjust for the sale of our Darwin property and legislative changes increasing our effective tax rate, normalised NPAT for FY19 was up 7.5% relative to the previous corresponding period.

“Our combined New Zealand properties grew their earnings by 2.5% during FY19, while our International Business had a good year, achieving turnover of $14.1 billion”.

“The successful sale of both Darwin and a long-term concession over our main site car parks in Auckland will release around $450 million, which will allow us to repay debt and return some capital to shareholders via a share buy-back. We will continue with our share buy-back until the end of 2019 with Board approval to acquire up to 5% of total shares on the NZX,’’ Mr Stephens says.

“While we are more cautious in our outlook for FY20 due to the current economic climate, we continue to expect growth on a like-for-like basis as we ramp up preparations to operationalise our new assets in Auckland and Adelaide post completion and continue our focus on the creation of sustainable shareholder wealth and initiatives critical to our social licence to operate.’’

Property results in summary

SkyCity Auckland

Despite a more challenging operating environment, a strong comparative in 2H19 and on-going disruption in the CBD from various development projects, SkyCity Auckland achieved record EBITDA in FY19 of $267.9 million, up 2.8% on the prior year. Gaming revenue was up 5%, driven by strong performance in gaming machines and increased casino visitation. Non-gaming revenue was up slightly year-on-year with improved performances in food & beverage, offset by weaker hotel revenue. Margins in Auckland were stable on a like-for-like basis despite increased cost pressures.

Mr Stephens says SkyCity’s master planning for the Federal Street precinct in Auckland is beginning to take shape, with the property acquisitions largely completed and the move of head office to SkyCity HQ on the corner of Albert and Victoria Streets underway. This move will allow for Federal House on Federal Street to be demolished and become part of a broader precinct development, which will include accommodation, retail and further entertainment/hospitality. SkyCity is actively seeking a development partner to co-invest in developing the Federal Street block and to unlock value on precinct.

The New Zealand International Convention Centre (NZICC) and Horizon Hotel project, which has been subject to considerable delays from the originally-contacted completion dates, is proceeding, albeit slower than desired. The NZICC is close to being weathertight and the shape and form of the meeting rooms, plenary, exhibition floor and public spaces are coming to life. The unique glass panels and terracotta spine wall created by New Zealand artists, Sara Hughes and Peata Larkin, are now visible at street level. The 300 room, 5-star Horizon Hotel is well advanced with the external façade completed and internal fitout well progressed. At this stage, we continue to expect completion of the project towards the end of 2020 and expect no material changes to previous guidance on the total investment for the project.

SkyCity Hamilton experienced flat earnings of $26.9 million, off a record previous corresponding period, with solid electronic gaming machine (EGM) performance and improved food and beverage contribution. Hamilton remains capacity constrained, with insufficient EGMs during peak periods limiting our ability to sustain the above-trend growth achieved over previous periods. SkyCity has an application with the Gambling Commission to replace three blackjack tables for 60 EGMs in Hamilton. A public hearing to consider this application is due for November 2019.

Mr Stephens says SkyCity continues to evaluate the potential for further development opportunities in both Hamilton and Queenstown. “We own undeveloped freehold land in Hamilton adjacent to our casino which could accommodate an hotel. We are keen to invest more in the Waikato region, but we still have work to do to ensure the project is feasible for the business and acceptable to SkyCity shareholders,’’ Mr Stephens says.

SkyCity’s combined Queenstown properties grew earnings by 12.5% to $2.3 million driven by increased visits from local premium customers and operating leverage, albeit with a weaker 2H19 due to the later start to the winter season. International Business turnover at Queenstown was up approximately 50%, highlighting the attractiveness of the location for premium/VIP customers and reinforcing SkyCity’s strategy to create a new luxury hotel in that destination.

“We have acquired a hectare of lakefront land with panoramic views of the Remarkables and Lake Wakatipu’’ says Mr Stephens. “Premium accommodation in Queenstown remains undersupplied despite the prominence of high-value tourists a significant opportunity exists for SkyCity to provide an integrated gaming/lodging offering for VIP/premium customers given the popularity of the location. However, our plans ultimately hinge on getting the required regulatory change.’’

SkyCity Adelaide Casino’s EBITDA fell 6.8% on continued disruption caused by building works around the property, combined with increased marketing and promotional costs required to sustain the revenue base. On a like-for-like basis, excluding A$1.7 million of restructuring costs incurred during 1H19, EBITDA was slightly up. David Christian commenced as General Manager, Adelaide Casino, during 2H19, bringing considerable operational experience to the role and an expertise in delivering and opening new mixed-use casino developments.

Adelaide’s casino expansion project is progressing well with Hansen Yunken, the main construction contractor, on-time for a September 2020 completion. The “topping off’ of the new facility is expected to take place in September 2019 and the hotel, casino levels and public spaces are well established – the first glass fin panels were installed in early June. Walker Corporation, which is developing Festival Plaza (adjacent to the casino) including a 1,500-space car park, is progressing satisfactorily. The project remains within its $A330 million budget.

The International Business division of SkyCity delivered its highest ever turnover - $14.1 billion – up 18.9% on the previous year, with normalised EBITDA of $41.7 million, up 27.7%. The result in International Business was driven by a combination of repeat visits from major customers and higher average spend per customer. Our customers being lucky during period also contributed to higher turnover.

The casino win rate in International Business ended at 1.00%, below the theoretical of 1.35%, leading to a significantly lower EBITDA at the reported level, down 91% to $3 million. Consistent with the prior period, International Business achieved minimal bad debts and continues to have a conservative approach to credit. SkyCity has a significant focus on know-your-client and AML checks for both prospective and existing customers.

Progress on Key Strategic Initiatives

During the financial year, SkyCity successfully implemented several initiatives to improve operating performance including new events/promotions, more effective marketing, investing in new products, and placing a greater emphasis on data analytics.

“We continue to make good progress on the investment in ICT and our digital capability,’’ Mr Stephens says. “We have delivered significant change to critical ICT infrastructure over FY18 and FY19 and are now at a point where we can focus on initiatives to enhance the customer experience, centred around CRM and loyalty improvements.

“SkyCity remains firmly focused on achieving efficiencies where possible to offset cost inflation, particularly in New Zealand, and achieve operating leverage. SkyCity has a lean operational model with detailed cost reviews completed annually.

“We were excited to launch a refresh of our brand on 1 July in New Zealand with changes to signage and brand collateral being progressively implemented. Our new brand is reflective of who we are now a diverse, dynamic, entertainment company. Our approach to the refresh has been to focus on the customer and to make incremental changes to avoid a costly replacement of touchpoints. We plan to launch the refresh in Adelaide around the time the new expanded facility opens, which will also coincide with a name change from Adelaide Casino to SkyCity Adelaide.’’

Online Gaming

In early August 2019, SkyCity launched its offshore online casino offering via a Maltese subsidiary, in partnership with Gaming Innovation Group Inc, a leading European based online gaming platform provider, for New Zealand customers only. The SkyCity online gaming business is managed by an Online Director based in Europe. The site offers high-quality host responsibility and a trusted brand.

Mr Stephens says SkyCity supports regulation of the New Zealand online casino market, including introducing an appropriate licensing regime for operators and imposing taxes and mandatory host responsibility requirements. “A regulated online gaming market remains our preferred solution, but in the meantime our venture into online gaming is another step towards growing and diversifying our earnings, addressing a fast growing industry which is highly complementary to our land-based activities, and offering customers a multi-channel gaming experience.’’

Other Forms of Entertainment

As an entertainment and hospitality provider, SkyCity is challenged to stay relevant in relation to new forms of entertainment competing for disposal income. “Digital entertainment is obviously growing rapidly and, in addition to our foray into online gaming, we have also invested in New Zealand’s leading broadcaster and operator of esports, Let’s Play Live Media (LPL). We now own 100% of this business and, although it’s a relatively small investment, given that esports is one of the fastest growing forms of entertainment globally (and particularly popular with millennials), we are hopeful that there will be synergies that we can develop to increase visitation to property as well as significant brand awareness,’’ Mr Stephens says.

“In addition, in 2020, our existing convention centre in Auckland becomes home to the All Blacks Experience and Weta Workshop, both providing unique, interactive customer experiences. Federal Street continues to evolve into an entertainment zone focused on food, beverage, and family entertainment ensuring long-term relevance of our precinct. SkyCity considers itself privileged to be partnering with two of New Zealand’s iconic global brands which, together with the Sky Tower, will create a must-see entertainment destination, with more attractions to come.’’

Character and Culture Goals

SkyCity places a heavy emphasis on protecting and enhancing its social licence to operate. Following the progress made during FY18, the company has continued to invest in key sustainability initiatives and is beginning to be recognised as a leader in these areas, culminating in winning the Diversity & Inclusion category at the Deloitte Top 200 Awards for its Māori leadership programme, Tahuna Te Ahi. SkyCity continues to actively promote women into leadership positions and remains focused on youth development and supporting its most vulnerable staff.

“At SkyCity we are proud of, and rely on, our culture of compliance which encourages people to focus on doing the right thing by themselves, their team mates, the company and stakeholders,’’ Mr Stephens says. “A recent culture survey produced strongly positive results and underpins our refreshed staff values of “Own it, Share it, Live it” - which were developed in consultation with staff and hence reflect what working at SkyCity means to them.’’

Caring for Our Environment

SkyCity is on-track to become a fully carbon-neutral company, with its New Zealand footprint for FY18 now accurately measured and audited. The company’s New Zealand sites will achieve carbon neutrality in September 2019, with Adelaide following next year. Good progress has been made in reducing waste and pursuing energy savings, and the company has introduced an ethical sourcing code for all suppliers. SkyCity Auckland recently hosted the first anniversary of the signing of the Climate Leaders’ Coalition, of which the company is a signatory.

Outlook for FY20

Commenting on the outlook for FY20, Mr Stephens says that SkyCity expects to achieve some group normalised EBITDA growth on a like-for-like basis, after adjusting for various structural changes to the business.

“Despite a more challenging and uncertain operating environment domestically and internationally, we continue to expect revenue growth across our various businesses, partially offset by increased cost pressures. We continue to monitor the economic environment, but believe there will be enough we can do to improve our own performance that we can reasonably expect growth on a like-for-like basis.’’

Mr Stephens says while year-to-date trading has been in-line with expectations, with a positive start in both Auckland and International Business (and a win rate above theoretical), FY20 and FY21 are transitory years for SkyCity as the company readies to open two new major projects.

“We have a strong platform to drive positive medium-term earnings growth and a high-quality team focused on delivery of our strategic plan. Our balance sheet is conservatively geared, our existing projects are funded and, whilst we continue to develop our Group master plans, we are yet to commit to anything new that could significantly impact us. We continue to invest for the future and look through the cycle to the earnings potential of the business in FY22/FY23 and beyond. In the meantime, we have stable and defensive earnings and pay an attractive dividend yield which should protect shareholder wealth.’’

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