If you believe there is opportunity in beaten down markets then the Australian gaming sector is worth a look. In the aftermath of the GFC these companies were hammered into a quivering pulp of their former selves. But some appear to be on the rebound.
Currently, there are three macroeconomic concerns creating volatility in markets globally. The first is US employment data indicating a slowdown in an already snail-paced recovery. The second is data from China, also suggesting a slowdown. The third is the ongoing European debt drama.
Whether you agree with it or not, the United States Federal Reserve has taken positive action with its Quantitative Easing efforts (QE1, QE2, and Operation Twist) with resultant benefits at least for shareholders. The following chart tracks the performance of the US S&P 500 Index before and after each QE program:
There are no guarantees there will be a third round of easing, but a number of US financial soothsayers are predicting QE3 before summer’s end.
China’s “slowdown” is real, but to put things in perspective, we are talking about 7% GDP growth, which is strong growth relative to many other nations. What’s more, the Chinese premier Wen Jiabao has stated that the country is committed to a long-term policy of economic growth through industrialisation and urbanisation. China watchers say that an economic stimulus package is almost guaranteed.
And lastly, the recent release of Australia’s 1st Quarter GDP growth came in far above estimates. In summary, while things appear bleak, in the end they are sometimes better than they seem.
Gaming stocks right now have a couple of things in their favour: in tough times the rich suffer hardly as much as the majority, and wealthy clients make up the lion’s share of gaming revenue. Secondly, a retiring baby boomer generation will provide plenty of fodder for gaming companies.
Here are seven of Australia’s publicly traded gaming stocks:
52 Week Lo
52 Week Hi
Tatts Group Limited
Echo Entertainment Group
Sky City Entertainment
Three of these companies are casino operators and the others are providers of gaming equipment and operators of wagering and sports betting. The company that jumps off the table at first glance is Tabcorp (TAH), with a P/E of 5.89 against a sector P/E of 11.24; an 11.5% fully franked dividend; and a stellar Return on Equity (ROE) of 44.2%. So let’s start there. For each of these stocks we will look at a ten-year share price chart to gauge performance prior to the GFC. Here is the chart for TAH:
In June of 2011 Tabcorps divested its casino operations into a new company – Echo Entertainment Group (EGP). While this strategic move allowed the company to focus on its core businesses of wagering and entertainment products, the analyst community was unimpressed, with a multitude of downgrades leaving no brokers with BUY ratings, 4 with HOLD ratings and 4 advising to SELL the shares. As you can see from the chart, the share price has improved somewhat in a dismal market and as of 08 June 2012 there are now 4 BUY ratings and 4 HOLD ratings.
Tabcorp is a diversified entertainment provider with multiple business divisions. Wagering activities are provided via a network of agencies, hotels and clubs throughout Victoria and New South Wales, as well as fixed odds betting on sporting and other events.
Gaming entertainment is provided through company owned and operated electronic gaming machines in licensed hotels and clubs. They also operate Keno throughout Australia and its Media and International operation broadcasts nationally and internationally through Sky Racing 1, Sky Racing 2 and Sky Racing World, as well as the Sky Sports Radio network in New South Wales.
The company has stated its intention to establish a dividend payout ratio of 50% of NPAT in FY12 and 80% of NPAT in FY13. If the Australian economy plunges into recession, then this target will be difficult to maintain. However, the company’s diverse offerings across gaming and entertainment appeal to a broad spectrum of the population.
EGP (Echo Entertainment Group) saw its share price spike dramatically in early 2012 when the company announced it would pay a first half dividend. Subsequent investments in EGP by Deutsche Bank and Australia’s leading casino operator Crown Ltd (CWN) provided further share price momentum. There now appears to be a takeover battle brewing between James Packer, the owner of Crown, and Singapore based Genting.
EGP is planning to issue a share offering to raise funds to fight the takeover. Although the share price movement may seem attractive to investors, be warned: EGP’s has high debt, announced a recent profit warning, that its share price is more likely inflated artificially by corporate interest. Analyst opinion is varied – RBS Australia says SELL and BA-Merrill Lynch says BUY.
Here is Echo’s one year price chart:
James Packer’s Crown Limited (CWN) owns and operates two integrated resorts: Crown Entertainment Complex in Melbourne and Burswood Entertainment Complex in Perth, as well as a 33% interest in Melco Crown in the lucrative Macau location. These properties are fully integrated resort complexes, with shops, restaurants and function facilities to complement the casinos. The company has interests in North America and the United Kingdom and an online betting exchange in Australia.
Crown is in the early planning stages of developing a new casino resort at a prime location on Sydney Harbour, with the support of the New South Wales premier. The Lord Mayor of Sydney, however, opposes the project. The projected cost of the project is $1 Billion and it is expected to give Australia’s small casino industry a boost and attract Asian tourists away from the more popular sites in Macau and Singapore.
The analyst community is enthusiastic about Crown’s prospects, despite the probable costs of an Echo takeover and the new Sydney project. Deutsche Bank, JP Morgan, Citi, UBS, BA-Merrill Lynch, and Macquarie all have BUY, OUTPERFORM, or OVERWEIGHT ratings with RBS Australia the only dissenter with a HOLD rating.
Here is its ten-year share price chart:
Sky City Entertainment Group (SKC) is the last casino operator from our table. They operate in Australia and New Zealand with casino resorts in Auckland, Hamilton, Queenstown, Adelaide, and Darwin as well as a variety of restaurants hotels, and convention centres. Below is its ten year price chart:
Although SKC has a decided advantage in that its casino are monopoly licensed, a major threat to the company’s growth plans is competition from casino operators in Singapore and Macau. SKC has plans to increase the number of its VIP Salons to compete with the Asian offerings; EGP has spent $800 Million renovating its properties; and CWN has ambitious expansion plans in Sydney as well as in increasing its stake in EGP. Gambling in Australia is regulated and government encroachment sometimes has a chilling effect on corporate growth. If you like this sector, you might want to consider keeping your powder dry until the dust clears over the EGP battle and the CWN plans for a new casino in Sydney get off the drawing board.
Tatts Group (TTS) is an Australia-based company with operations in the UK as well. They run regulated lotteries in Australia as well as offering totalisator and fixed price betting services and operating gaming machines. In addition, they sell gaming machine repair services, and in the UK slot machines and online gaming.
The analyst community is decidedly lukewarm on this stock with only two BUY ratings from BA-Merrill Lynch and Deutsche Bank. Their financial performance, however, is quite solid. Net operating cash flows grew from $369.4M in FY 2010 to $391.85M in FY 2011 and NPAT more than doubled from $119.4M to $275.4M. Here is their ten year share price performance chart.
Aristocrat Leisure Limited (ALL) operates all over the world providing a variety of gaming solutions. They are vertically integrated, designing, developing, and distributing their own gaming content, systems, and platforms. You can find all products in 90 different countries, with licenses granted by over 200 regulators. They provide more than electronic gaming machines. They also offer interactive video terminal systems as well as a variety of casino management software products for casino operators.
Despite their impressive global presence, the company has had better years, demonstrated by its share price chart:
Between FY 2010 and 2011 NPAT declined from $77.2M to $66.1M despite an increase in revenue from $680.5M to $704.3M. In May 2012 the CEO of North American operations resigned, and analysts view that as a major setback. UBS is the only major analyst with a BUY rating on ALL, calling a bottom on 29 February 2012 with the share price at $2.86.
In July 2011 Reuters reported that Tabcorps was expecting a merger with Tatts Group. No new updates have been issued, but that would be one to watch.
Our final offering is microcap eBet Limited (EBT). Here is their ten year price performance chart:
EBT (eBet Limited) is a high tech gaming company with an array of electronic gaming machines and networking platforms as well as player-tracking, loyalty systems and online wagering technologies. They have a Media division that designs, develops, and distributes mobile gaming and other technologies. They operate in Australia, New Zealand and the United States.
With a P/E of 5.86 against the sector P/E of 11.4, a respectable ROE of 10.3%, and innovative technology, they deserve a look.
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