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Convention centre fire 'immaterial' to SkyCity's 2020 operating earnings

Thursday 7th November 2019

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Casino operator SkyCity Entertainment Group says the impact of the Auckland international convention centre fire will be "immaterial" to the group's operating earnings in the 2020 financial year.

However, an assessment of the fire's impact on reported and normalised net profit after tax is yet to be completed, the company says.

While the fire will cause "material delays" to the project's completion, SkyCity says there is "at this stage" no change to its contractual position with Fletcher Building.

SkyCity is still required by its contract with the government to complete the facility by Jan. 1, 2023. That appears still likely to be met, even though the fire is "likely to impact ability for NZICC to host conferences in 2021," the company says in a presentation for investors in Adelaide today.

The impact beyond 2021 is "not yet known."

The most nationally significant event for which the convention centre is required is the APEC Leaders' Week in November 2021 and government officials are currently scoping alternative venues.

No material change to the total cost of the project is expected, given the insurance arrangements covering the project, which were increased in 2018.

In the wider group, presentation slides for chief financial officer Rob Hamilton say the company expects flat normalised group revenue in the current financial year. There will be "some growth" in FY20 group earnings before interest, tax, depreciation and amortisation, with the impact of the convention centre fire "immaterial" in that financial year.

However, the broader accounting impacts of the fire on normalised and reported net profit after tax were still being assessed, and the company is "unable to update guidance at this time."

Elsewhere in the briefing, board and management presentations focused particularly on the expected positive impact on earnings of its major upgrade to the Adelaide casino, which is currently nearing completion. It also outlined internal restructuring intended to make earnings from hotel operations a more important contributor to group performance.

There is "limited opportunity to scale core gaming business in New Zealand and Australia", the company says, so it intends to leverage its "significant operating expertise in managing hotels and well-recognised hotel brand." There is also an "opportunity to expand the hotel business through further developments in Auckland/Hamilton/Queenstown and hotel management opportunities."

SkyCity says hotels are a "highly attractive asset class which attracts global investor demand for New Zealand opportunities", particularly given booming tourism from Chinese and other Asian countries' middle classes. Occupancy rates in Auckland's five-star hotels are expected to remain above 80 percent for the next decade, despite new hotels being built.

"SkyCity Hotels expected to deliver $55 million-$60 million in EBITDA post completion of major projects in Adelaide and Auckland," the company says, with hotels to be the second-largest business activity behind gaming.

The company says it is exploring further hotel development opportunities in New Zealand, with around $500 million of potential development in Auckland, Hamilton and Queenstown. It is open to external hotel management contracts if they're attractive and provide competitive advantages for SkyCity's newly restructured hotel management team.

Hamilton and Queenstown developments can be financed from existing facilities and future cashflows, but SkyCity "may seek a partner to enhance returns" and may also consider partnering for the hotel component of its Auckland site master plan. There is no plan or need to sell hotels or associated real estate at present.

On the convention centre fire recovery process, SkyCity says it has engaged external advisers to "assist with managing claims and assessing damage and rebuild required, (and) to ensure SkyCity’s interests are protected." 

It confirmed its insurance cover is provided by a lead insurer with an AA-minus Standard & Poor's credit rating, covering both the NZICC and the next door Horizon Hotel, which appears to have suffered limited damage from the fire in the roof of the partially completed convention centre.

SkyCity shares fell 0.8 percent to $3.85, trimming their gain so far this year to about 11 percent.



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