SkyCity cut to 'sell' by Craigs, citing lack of return and high risk

It shares have dropped 5.6% the past week since Craigs recommended investors sell the stock, and last traded at $3.87.

SkyCity Entertainment Group [NZX: SKC] was downgraded to 'sell' from 'hold' by Craigs Investment Partners, reflecting that the brokerage doesn't expect shares in New Zealand's only listed casino company to offer a return in the next year.

The Auckland-based casino operator's shares have dropped 5.6 percent the past week since Craigs recommended investors sell the stock, and last traded at $3.87.

SkyCity's main Auckland business will probably return to growth this year following eight years of largely flat earnings, however the company is entering a riskier period with about $1 billion required for future development, including at its Adelaide business and for the planned NZ International Convention Centre in Auckland, Craigs lead research analyst Adrian Allbon said in a note.

"With SkyCity now offering nil 12-month total return potential on our valuation framework we downgrade our rating to sell (from hold)," Allbon said in the note which was co-authored by Deutsche Bank analyst Mark Wilson.

"With SkyCity entering the execution phase of deploying a large amount of capital and fully loading its balance sheet with debt over FY16-18 to create a subsequent step increase in earnings from its two key properties Auckland and Adelaide, investors deserve some valuation margin of safety given the asymmetry of near term risk vs. longer term reward."

The brokerage said its preferred Australasian casino investments was in Echo Entertainment Group, followed by Crown Resorts, both of which are offering about a 30 percent 12-month total return based on its valuations.

(BusinessDesk)

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