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Forsyth Barr says SkyCity Entertainment Group should be moving into a much stronger period of cash flow generation now that its major capital expenditure projects are complete. The investment firm said the New Zealand casino operator could use that shift to lift dividends and return more value to shareholders in the years ahead.
Analyst View On Cash Generation
In a note published on Smartkarma, analysts Paul Laxton Koraua and Andy Bowley said the Auckland-based group should be a highly cash-generative business. SkyCity runs integrated resorts in Auckland and Adelaide, along with smaller casinos in Queenstown and Christchurch.
The analysts said the company’s record over the past 12 years has been underwhelming, largely because of major capital-intensive projects that have absorbed more than half of the NZ$2.5 billion in operating cash flow generated since FY15. They said that spending has also led to disappointing shareholder outcomes.
Even so, Forsyth Barr said the completion of those projects now creates room for a different phase of performance. The firm said SkyCity should be able to deliver a free cash flow yield above the 14% currently forecast for FY26.
Projects Now Complete
The analysts pointed to 2 key developments that are now finished: the New Zealand International Convention Centre and the expansion of SkyCity Adelaide. With those projects behind it, the company has an opportunity to move toward higher cash returns and a stronger payout profile.
Forsyth Barr said the path to a free cash flow yield of around 20% in FY28 is relatively straightforward. The analysts said that would be supported by selling assets that are already being marketed, including The Grand by SkyCity hotel, an Auckland office property, and a carpark concession. They said those divestments should improve free cash flow by reducing interest costs and lowering capex requirements.
They also said maintenance capex should be reset closer to historical levels as a percentage of depreciation and amortisation, and as a share of fixed asset value.
Dividends And Residual Cash
Forsyth Barr said that with this level of free cash flow generation, SkyCity could support a double-digit cash dividend yield in FY28. The analysts added that the company would still have significant residual free cash flow available for other capital initiatives.
That view suggests the company could be entering a more mature phase in which its recent heavy investment cycle gives way to greater flexibility. For Forsyth Barr, the completion of the large projects appears to mark the point at which the business can start translating its operating base into stronger shareholder returns.
Source: Inside Asian Gaming
