Citigroup downgrades advice on Sky City [+audio]

Citigroup Research today downgraded its rating on Sky City Entertainment from "hold/medium risk (1M)" to "hold/medium risk (2M)".

It also lowered its earnings forecasts, saying the casino operator's underlying revenue at the flagship Auckland operation was a major concern.

Sky City reported a 13 per cent rise in annual profit yesterday, though earnings before interest, tax, depreciation and amortisation (ebitda) rose 8 per cent. Ebitda at Auckland rose only 1 per cent, affected by increased regulatory costs.

"The group is heavily reliant on the performance of its core Auckland business, which accounts for around 70 per cent of earnings," analysts Andy Bowley and Jenny Owen said in a report.

"Any material change in performance in Auckland will also have a material impact on the group."

The analysts estimated that average revenue from each gaming table had fallen about 24 per cent in the second half of the year, compared to the first half.

"The key issue going forward in our modelling for the company concerns the normalised level of activity for Auckland's tables.

"While we believe ...there are several drivers in place ... to support upward momentum for Auckland's tables from the current low base, we can no longer assume consistent growth is a given."

Citigroup reduced its forecasts for Sky City's net profit for fiscal 2007 by 7.3 per cent to $123.4m, and its ebitda by 3.3 per cent to $322.5m. It lowered net profit in 2008 by 9.9 per cent to $128.4m and forecast a 3 per cent drop in ebitda to $334.8m.

Citigroup added that any consolidation in the Australasian gaming sector would make Sky City a potential bid target.

Sky City has a virtual monopoly on New Zealand casinos, and owns the Darwin and Adelaide casinos in Australia, as well as cinemas and hotels.

Shares in Sky City, which slumped six per cent yesterday, last traded up 2 cents at $5.07, compared with Citigroup's reduced 12-month target of $5.40.

- REUTERS