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SkyCity shares spiral on cost cutting news

The SkyCiy Entertainment Group Limited (ASX: SKC) share price is down by 4.96% at the time of writing, after the group released an update to the market which detailed a slew of cost cutting measures designed to combat the impact of the COVID-19 pandemic.

What costs will SkyCity be cutting?

The COVID-19 pandemic has forced SkyCity to close all casinos, hotels, restaurants, bars and attractions. The company estimates that it is poised to lose NZ$90 million in revenue each month that closures stay in effect.

In order to minimise the financial impact the pandemic has had on the company, SkyCity has introduced a range of cost cutting measures. The changes include a significant reduction in capital expenditure and reduction in operating costs which has resulted in the restructuring of the company’s management team and employee base.

SkyCity plans a $15 million reduction in stay-in-business capital expenditure and has put all but 2 development projects on hold, until the company’s properties reopen. SkyCity also announced that executive salaries will be cut by between 20% to 40% for the remainder of the financial year. The company’s board of directors will also cut fees by 50% for the period.

SkyCity has also asked its waged staff to cut to 80% of normal wages, with those not wishing to take the cut being offered the option of voluntary redundancy. Regardless of the cost cutting measures, the company forecasts that it will need to make 200 positions redundant. SkyCity has already stood down 90% of the workforce in its Australian operations.

SkyCity estimates that the cost reduction plan for staff will generate savings of close to NZ$50 million annually while redundancies are likely to cost NZ$11 million.

How has Skycity responded to the pandemic?

SkyCity released an announcement in mid-March outlining the impact of the COVID-19 pandemic on its operations and earnings outlook. The company cited border control and social distancing measures and restrictions as having a negative impact in its businesses in Australia and New Zealand.

Based on the restrictions, SkyCity estimated that the company could experience a NZ$55 million impact in earnings before interest, tax, depreciation and amortisation (EBITDA) for the full year. SkyCity revised EBITDA for FY20 to between NZ$230 and $NZ250 million, and net profit after tax for the full year to be in the range of NZ$85 to NZ$100 million. However, it is to be noted that the revised guidance assumed that all SkyCity properties remained open for business, which is no longer the case.

Foolish takeaway

Given the evolving nature of the pandemic, SkyCity informed investors that further changes may be made if properties remained closed beyond 30 June and if travel restrictions remained in place for longer.

The SkyCity share price has plunged more than 49% for the year and is trading more than 4% lower at the time of writing.

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Motley Fool contributor Nikhil Gangaram has no position in any of the stocks mentioned. The Motley Fool Australia has recommended Sky City Entertainment Group Ltd. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.