Stock in Focus: Sky City Entertainment (SKC.NZX)
Sky City revealed a strong half year result for the 2023 financial year as tourism reopens, however the stock remains beaten down as a “risk asset” as well as regulatory issues from its Adelaide property and similar regulatory issues at rival Star Entertainment weighing down on the sector.
Operating earnings (EBITDA) for the half came in at $162.4m, ahead of market expectations and up 4-fold from the corresponding period last year which was heavily impacted by closed international borders and local lockdowns. Improved operating conditions and confidence in the outlook meant SKC reintroduced their dividend.
While a risky proposition we still like the stock as a way to gain tourism exposure — the worst case scenario of any regulatory action is fully priced in. We remain BUY rated on SKC as our second pick for tourism exposure after Tourism Holdings.
New Zealand Market Movers
The New Zealand market (NZX50, -0.5%) was down on a weak lead from global markets.
Fletcher Building fell -2.4% after telling the market it has been served with a shareholder class action lawsuit relating to their disclosures about its building and interiors business between August 17, 2016 and October 23, 2017 and shares bought by investors during that period. We still rate Fletcher as a buy – trading at cyclical lows and yielding a fwd dividend of ~6.5%
Pushpay revealed its has extended its scheme arrangement date from Monday to Wednesday for BGH group to make a revised offer. Our gut feel is they have a slightly higher offer in mind, but are awaiting financing which may be more challenging following the SVB issues.
Australia Market Movers
The Australian Market (ASX200, -0.5%) as local companies reveal their exposure to SVB.
Xero has exposure of US$5m which is under 1% of their total cash of as of September 2022, with many other tech names reveal minor banking exposure. Xero still rated as a high-risk buy – SVB is a minor haircut. The news sparking fear across the banking sector which was the worst performing sector, while a pickup in iron ore prices saw major miners perform well.
US Market Movers
Markets whipsawed up then down, finally closing -0.15%.
It’s ironic to us that a whole bevvy of US bank stocks fell overnight (due to the SVB implosion): we’re reminded of the old adage “throwing the baby out with the bathwater”. What happened with SVB was an old fashioned bank run: lots of people wanted their money out, and the bank was forced to sell short-dated bonds at a discount. It was effectively a $2B capital raise gone wrong. This is an anomaly: most banks ladder bonds – they will own some short term, some long term, some cash and cash-like assets: to park all your despositor’s cash in extremely low interest rate bonds is very stupid. Most banks don’t do this! In other words, we see some opportunity in sold-off bank stocks today that aren’t anywhere near as illiquid or exposed to the same risks that SVB was exposed to.
Where do we see some opportunity?
The most obvious opportunity to us is Charles Schwab (SCHW) which fell ~11.55% today and as low as $45 per share intraday. Schwab makes money on the spread between the low rate it pays customers for cash they hold in their accounts and the rate it can earn investing that cash. Schwab’s earnings per share grew 20% last year, to $3.90. Schwab’s “money market” rate has crept up to ~4.48% – it isn’t earning as much of a spread but because its portfolio of fixed-interest rate securities is laddered its losses from low-yielding securities are quite low. The company has $36.6 billion of shareholder’s equity and a tier one leverage ratio of 7.2% (the regulatory minimum is 4%). As long as Schwab holds its lower-interest rate securities until maturity they should be fine and not incur a loss. Schwab’s core business – brokerage and wealth management – remains strong. Last year 4 million brokerage accounts were opened in the US. It trades at 10x fwd earnings, trades at ~$51.91 (down 36.75% YTD), and earns a very good 19% return on equity. Moreover, we think it has a strong franchise and a “wide moat”: it’s a chance to buy quality for less.
We also like Citigroup and Bank of America (they fell 7.47% and 5.85% respectively). Both banks have little credit risk and a lot of shareholder’s equity – $201B and $273B respectively. They were sold off due to sentiment. They are entirely different banks compared to SVB which are cruical to the economy of the US. On one hand, they are “too big to fail”. On the other hand, they are strong businesses which can be had for a discount upon market fear – be greedy when others are fearful.
What Markets will be Watching this Week
Monday
Tuesday
Reserve Bank of Australia (RBA) interest rate decision
Wednesday
Thursday
Bank of Canada (BoC) interest rate decision
Friday
US Non-Farm Payrolls
Bank of Japan (BoJ) interest rate decision