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SkyCity Entertainment faces financial challenges

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2024-06-06

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Shareholders in the Trans-Tasman casino group SkyCity Entertainment (ASX:SKC) will bear the costs of the slowdown in business and gambling at its casinos in Auckland and Adelaide by missing out on three dividend payments over the next 18 months.

This news, along with an earnings downgrade and gloomy forecasts, caused shares to plummet more than 14% in afternoon trading on the ASX on Thursday. The company surprised earlier in the day with a downgrade in earnings for the year to June and an early heads-up that the tough trading conditions were expected to impact its businesses well into 2024-25.

In addition, the company faces a hefty fine from the Australian financial regulator AUSTRAC next month for breaches of money laundering rules and needs millions of dollars to pay the final bills on the delayed new hotel and convention center in Auckland—a contract that has also financially impacted Fletcher Building, the constructor of the project.

It is due to pay AUSTRAC $A67 million next month, and it reckons it will cost another $NZ76 million to finish the delayed new hotel and convention center in Auckland. For this reason, it has decided to withhold the next three dividends to shareholders and says it expects to resume in the 2026 financial year. As a result of a significant slide in expected earnings and financial pressures of more than $NZ100 million in the opening months of 2024-25, shareholders will receive no income.

The company has suspended its dividend payout to shareholders for the final year to June and for all of 2024-25. It paid a 9 NZ cents per share final dividend a year ago and an interim dividend for the current year of 5.25 NZ cents earlier this year. Another delay in the opening of the Horizon Hotel, adjacent to the International Convention Centre in Auckland, is also contributing to the downturn, now expected to open in August and requiring an extra $NZ76 million to pay the final bills.

Sky has attributed the sluggish economy, high interest rates (especially for home loans), and weak outlook to consumers' reluctance to spend money on what they now perceive as frivolities. People are turning up, but not spending as much at the casinos, especially in Auckland, and compounding the pressures on the businesses has been a lack of growth in tourists willing to spend money for entertainment. This, in turn, has been impacted by the anti-money laundering crackdown and huge fines levied on both companies for breaches of these laws—especially in Adelaide but also in Auckland.

Thursday’s announcement saw Sky reveal the impact of the sluggish trading conditions on its financials—full-year profit will be lower than expected for the June 30 year, and this trend is expected to continue into 2024-25. SkyCity expects full-year underlying profit to be down for the year ending June by between $NZ10 million and $NZ25 million from an earlier forecast of $NZ280 million to $NZ285 million. This is likely to see net profit decrease by between $NZ5 million and $NZ10 million to a range of $NZ120 to $NZ125 million. The company also warned that the outlook was subject to a number of regulatory reviews and penalties which could add to costs, such as the potential for an increase in duty expenses at the Adelaide casino and the possibility of a temporary suspension of its operator's license at New Zealand casinos, with a decision set for August. SkyCity estimated underlying profit for the 2025 financial year would be between $NZ250 million and $NZ270 million, including potential one-time costs of about $NZ20 million to $NZ30 million.

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