NZICC Opening And Gaming License Application Will Strengthen Position

Key Takeaways

• The opening of the New Zealand International Convention Center and potential online gaming license could drive significant revenue and visitation growth.
  
• Risk transformation, strategic technology investments, and asset monetization aim to improve compliance, enhance margins, reduce debt, and boost shareholder returns.
  
• Challenging economic conditions and regulatory changes in New Zealand are impacting SkyCity's gaming revenue, margins, and investor confidence.

Catalysts

Operates in the gaming, entertainment, hotel, convention, hospitality, and tourism sectors in New Zealand and Australia.

• The opening of the New Zealand International Convention Center (NZICC) in February 2026 is expected to significantly increase visitation and drive additional revenue, with anticipated annual visitor days increasing by 500,000, potentially boosting both foot traffic and cross-spend in the Auckland precinct.
  
• SkyCity's engagement with New Zealand regulators for the anticipated regulation of online gaming in 2026 presents significant growth potential, as the company plans to apply for an online gaming license to capture revenue from the currently estimated $700 million gray market, which could enhance overall group revenue and earnings.
  
• Multiyear risk transformation and culture change programs are underway to improve regulatory compliance and operational resilience, which can stabilize regulatory costs over time and preserve gaming licenses, thereby protecting future earnings.
  
• Strategic investments in technology and innovations, such as advancing AI tools and moving to 100% account-based play, are aimed at enhancing the customer experience and operational productivity, potentially improving margins and long-term revenue growth.
  
• Asset monetization strategies, including the monetization of select properties and recycling of capital to reduce debt and invest in growth opportunities, are expected to enhance SkyCity’s return on invested capital and bring it closer to resuming dividend payments, positively impacting shareholder returns and the financial position.

SkyCity Entertainment Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming SkyCity Entertainment Group's revenue will grow by 7.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from -18.9% today to 10.8% in 3 years time.
• Analysts expect earnings to reach NZ$111.4 million (and earnings per share of NZ$0.15) by about May 2028, up from NZ$-159.8 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as NZ$38 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 15.0x on those 2028 earnings, up from -5.1x today. This future PE is greater than the current PE for the NZ Hospitality industry at 14.9x.
• Analysts expect the number of shares outstanding to grow by 0.06% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.12%, as per the Simply Wall St company report.

SkyCity Entertainment Group Future Earnings Per Share Growth

Risks

• Economic conditions in New Zealand remain challenging, with lower spend per visit affecting revenue negatively, particularly in the Auckland region where gaming revenue declined by 12%. This directly impacts future revenue growth.
  
• The implementation of mandatory carded play is estimated to impact 15% to 20% of uncarded revenue, which could restrict gaming revenue and affect overall earnings as customers adjust to the new system.
  
• The ongoing risk transformation program and related costs, particularly in Adelaide, result in significant expenditures ($60 million over three years), potentially impacting net margins until completed.
  
• Increased regulatory compliance and historical capital investments have put pressure on return on invested capital, suggesting potential challenges in improving net profit margins in the near term.
  
• The potential delay in consumer spending recovery due to economic conditions, coupled with the deferral of dividend payments, could impact investor confidence and earnings expectations.

Valuation

• The analysts have a consensus price target of NZ$1.652 for SkyCity Entertainment Group based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of NZ$2.8, and the most bearish reporting a price target of just NZ$1.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be NZ$1.0 billion, earnings will come to NZ$111.4 million, and it would be trading on a PE ratio of 15.0x, assuming you use a discount rate of 10.1%.
  
• Given the current share price of NZ$1.08, the analyst price target of NZ$1.65 is 34.6% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.