Brokerage Forsyth Barr’s analysis suggests that the casino operator SkyCity’s share price is currently trading at roughly a 50% discount to its asset book value, which they consider excessively severe.
Most businesses reliant on the domestic economy faced challenges from sluggish business and consumer demand. However, SkyCity was especially affected by the postponed opening of the International Convention Centre (NZICC), along with expensive regulatory issues in New Zealand and, notably, ongoing problems related to its unprofitable Adelaide Casino in Australia.
Forsyth Barr analyst Paul Koraua stated that SkyCity is anticipated to exceed its latest closing share price of 74 cents, with a target price of $1.10 per share, still reflecting a 20% discount to its book value.
Several NZX-listed companies were viewed as trading below their book value, as shown by takeover bids for Restaurant Brands and Bremworth that were higher than their share prices prior to the offers.
“The problem is that Sky City, like a number of other businesses, has been in quite a long earnings downturn – two years of earnings downgrades – which weighs on investor sentiment,” Koraua said.
“I think what people are waiting for is for that earnings downgrade to start to slow and turn around before they can start looking forward to say, well, actually, we think the discount is too punitive.”
SkyCity was expected to gain from an improving economic outlook, alongside the completion of the NZICC and City Rail Link projects, as well as a cyclical rebound in visitor numbers and discretionary spending.
“The market typically prices things at a discount when they don’t believe what the book value is, or they think a company is going to destroy value over time,” Koraua noted.
“Over the foreseeable future, we still see this as a business that is going to be short of its cost of capital and, by definition, destroying shareholder value (but) not to the extent that’s being priced by the market.”