SkyCity Earnings: Compliance Costs Mounting

We lower our fair value estimate for shares in SkyCity by 6% to NZD 3.30 (AUD 3.10) due to a structurally higher compliance cost base and higher-than-expected one-off fines. Interim fiscal 2024 underlying EBITDA fell 10% on the previous corresponding period to NZD 146 million—broadly in line with our unchanged NZD 289 million forecast. The weaker discretionary spending environment is seeing a reduction in spending by the mass market, weighing on casino earnings, particularly gaming machine play. But shares continue to screen undervalued. We think the market is overly concerned by regulatory headwinds, overlooking SkyCity’s strong earnings potential. We forecast a five-year EPS CAGR of 7% over the next five years, underpinned by the recovery from the current cyclical downturn and a solid performance from the core Auckland property, which underpins the firm’s narrow economic moat.