SkyCity Entertainment Group is one of 11 entities confirmed this week to have earned the right to apply for online casino licenses in New Zealand, however investment firm Forsyth Barr has warned the project could be “net present value (NPV) neutral” with rate of return broadly in line with cost of capital.
The New Zealand-based integrated resort operator, whose assets include SkyCity Auckland, two smaller casinos in Hamilton and Queenstown plus SkyCity Adelaide in Australia, has secured the right to apply for two online licenses, which at a cost of NZ$15 million per license would see it required to pay NZ$30 million to secure both.
According to Forsyth Barr, online gaming would contribute a modest 5% of SkyCity’s group pre-overhead EBITDA once fully operations, with the investment firm’s modelling suggesting a potential project NPV of between -6% and +11% of the current share price.
As such, the investment is seen as being more strategic than financial because “becoming a meaningful online operator could help insulate SkyCity from any migration away from its land-based casino to online.”
It added, “We model the online opportunity as a discrete eight-year project and estimate the opportunity is broadly NPV neutral with our forecast project IRR (internal rate of return) in line with its cost of capital. The commercial assumptions we use to derive this outcome are likely more conservative than SkyCity’s business case given its own hurdle rates are likely to be in excess of its own cost of capital.”
The investment does, Forsyth Barr states, offer “useful diversification” and could prove profitable if SkyCity can outperform expectations.
However, SkyCity’s long-term investment thesis is more likely to be driven by deleveraging of its balance sheet through asset sales, driving strong cash flow from its existing operations and leveraging Auckland to an eventual domestic recovery.
In a Tuesday filing, SkyCity CEO Jason Walbridge said, “We are excited to have been successful in the auction to apply for two licences and to be taking the next step towards entering the online casino gambling market in New Zealand. We know New Zealanders trust the SkyCity brand, and we will combine that trust with our deep knowledge of the New Zealand market to build a successful online business here.”
On the New Zealand online opportunity, Forsyth Barr analysts Paul Laxton Koraua and Andy Bowley assume a pre-regulation market size of NZ$1.4 billion, a stabilized channelisation rate of 70% and market growth of around 7% over the initial five-year period post regulation, normalizing at 5% thereafter. SkyCity’s share is seen at around 13% assuming two licenses, or 7% with one.
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