Skycity Entertainment Group (ASX:SKC): Is it on the same fatal path as Star Entertainment?

Is Skycity Entertainment Group (ASX:SKC) on the same path as Star? On one hand, it may sound preposterous as it has revenues just about the same as it was pre-COVID and it is profitable. The other, it announced a $240m capital raising the same day as its annual results and is seeing customers spend less at its casinos.

Overview of Skycity Entertainment Group

Skycity owns casinos in New Zealand (Auckland, Queenstown and Hamilton) and Adelaide. It listed on the NZX in 1995 and on the ASX in 1999, following the Australian financial year.

Skycity and its casino peers began addicted to ‘high roller gamblers’, particularly from China. The concerns about this first became apparent in late 2016 when China arrested a handful of staff from Crown that were in China trying to lure tourists to the casino. Xi Jinping became increasingly paranoid about money laundering and cash being funneled out of China, and saw casinos were a channel for that.

Then, during the pandemic, numbers dried up altogether. Skycity’s Auckland casino was shut for a total of over 3 months during the pandemic, revenues fell 33% and the company slashed 700 jobs. It appeared things were on the rebound once the pandemic was over because Skycity actually returned to pre-pandemic levels. But there were still problems including reduced spending by consumers at casinos, impairments and a $67m penalty from AUSTRAC for insufficient AML/CTF checks.

Raising fresh capital

Last week, the company released its results. It was far from a disaster. Customer visitation remained strong, up 4.6%. Its revenue, while 5% lower, was at pre-COVID levels. And a major catalyst in the new year would be the New Zealand International Convention Centre opening its doors next February, which would see 500,000 extra visitations. It was also working on its online platform – something Crown and Star did not have. The challenge would be securing local approval, but if it could do this, capture a market opportunity of up to $700m.

The company’s underlying EBITDA was $216.1m, 16% down, and its underlying profit was $71.5m, down from $123.3m. It issued $190-210m EBITDA guidance and paid no dividend. It was facing its Queenstown and Hamilton licenses expiring in the next couple of years but made an application for renewal. Its Auckland license runs through to 2048 and its Adelaide license runs out in 2085, but exclusivity ends in 2035.

The thing that made this company stand out was a surprise $240m capital raising, comprising of an $81m placement and $159m rights issue. The deal was done at NZ$0.70 per share, a 30% discount to the previous share price. 343m new shares would be issued, representing 45.1% of the existing shares on issue.

The plan is to spend NZ$122.5m just on repaying debt with $10m paying for transaction costs and the balance will be cash held to offset the remaining debt balance. There are plans to sell off certain assets in Auckland (specifically a carpark and an office building in Albert St) and reach <2x net debt/EBITDA. But more generally, the company said it wanted to hold a buffer through a weaker time. It rejected the option of selling the Adelaide casino. The AFR reported major shareholders backed it – one exemption was Allan Gray, albeit reversing its stance when it was clear it would be severely diluted.

Going the way of Star?

Let’s go back to the question in the title of this article. It is easy to suggest it is far-fetched and that the company will get through the period. But there was a time when Star was raising capital – $750m in early 2023 and then had to raise capital in less than 12 months. Skycity could cop a fine from the South Australian regulator for historical misconduct, and it remains to be seen if the new convention centre really will make a difference to numbers. And we also note that it had to raise capital at such a hefty discount.

The foray into online games is something Skycity has in its favour that Star never did, so we’ll give this company that. But we think investors should be cautious with this company and the entire casino sector.

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