New Zealand’s SkyCity Entertainment Group should be entering a period of much stronger cash flow generation in the months and years ahead, providing an opportunity to reward shareholders with higher dividends following the completion of major capex projects, according to local investment firm Forsyth Barr.
In an analyst note published on the Smartkarma platform, Forsyth Barr analysts Paul Laxton Koraua and Andy Bowley said the Auckland-based casino operator – which runs integrated resorts in Auckland and Adelaide and smaller casinos in Queenstown and Hamilton – “should be” a highly cash-generative business.
However, they described the company’s track record over the past 12 years as “underwhelming” – mainly because of large capital-intensive projects that have consumed more than half of the NZ$2.5 billion in operating cash flow generated since FY15. This has also resulted in what the analysts say are “disappointing shareholder outcomes.”
Nevertheless, these projects – namely the development of the New Zealand International Convention Centre and expansion of SkyCity Adelaide – are now complete and an opportunity exists to achieve a free cash flow yield that is greater than the 14% currently forecast for FY26.
“The path to a ~20% free cash flow yield in FY28 is relatively straightforward,” the analysts said. “Divest the assets currently marketed for sale (The Grand by SkyCity hotel, an Auckland office property and a carpark concession), which should be free cash flow accretive through lower interest costs and reduced capex requirements; and reset maintenance capex closer to historic levels as a per cent of D&A and fixed asset value.
“With this level of free cash flow generation, we estimate that SkyCity could support a double-digit cash dividend yield in FY28, while retaining significant residual FCF for other capital initiatives.”
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