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The Deloitte Access Economics series of reports, Building the Lucky Country, provide potentially lucrative advice for top-down investors.  The latest in the series, Positioning for Prosperity:  Catching the Next Wave, highlights five “super-growth” sectors that will reportedly contribute an additional $250 billion to our economy over the next 20 years.  Here are the sectors:

•    Agribusiness

•    Gas

•    International Education

•    Wealth Management

•    Tourism

The Australian Tourism Sector has been paired with the word “beleaguered” for some time now, suffering from the crushing effects of the stubbornly high Australian dollar.  While the dollar has definitely fallen relative to the US dollar, its downward trek towards 80 cents recently stalled and reversed.  Here is an AUD/USD comparison chart for 13 February, 2014 from the website FXEmpire:

Some experts tell us the AUD will fluctuate slightly around this level for the remainder of 2014.  Others see a drop to 80 cents, with a longer term decline to 60 cents a possibility.  Only one thing appears certain: no one is predicting the AUD will rise above parity with the USD at any time in the foreseeable future.

That means foreign visitors can expect to get more for their money.  The Deloitte report predicts the tourism sector in Australia will double in the next two decades, largely as a result of an increasing stream of Asian middle-class tourists.  Some companies within the ASX could benefit more than others.  For example, airfare revenue might benefit less than additional revenue going to extended stay and extended use stocks, such as casinos and hotels and tourist attractions.  With that in mind, the following table looks at major ASX listed hotel and casino operators and tour operators.

Company

(CODE)

Mkt Cap

Share Price

52 Wk % Change

Dividend Yield

Forward P/E

(FY2015)

2 Year Earnings Growth Forecast

3 Year Total Shareholder Return

Crown Resorts (CWN)

$12.3b

$16.85

+43%

2.2%

16.68

22%

31.72%

Echo Entertainment (EGP)

$2b

$2.43

-34%

2.47%

 

9.2%

Sky City Entertainment

 (SKC)

$1.9b

$3.40

+3%

5.2%

13.6

13.7%

17.3%

Amalgamated Holdings

(AHD)

$1.3b

$8.20

+7%

5.12%

14.64

4.9%

16.4%

Village Roadshow

(VRL)

$1.2b

$7.42

+65%

4%

16.13

12.7%

47.2%

Ardent Leisure

(AAD)

$819m

$2.06

+34%

4.93%

13.73

6.5%

22.2%

Reef Casino Trust

(RCT)

$183m

$3.72

+47%

5.27%

14.88 (FY2014)

42.4%

SeaLink Travel Group

(SLK)

$113m

$1.62

 

Crown Resorts Limited (CWN) owns and operates two high-end casino/resort complexes in Australia; one in Melbourne and the other in Perth.  Both are fully integrated, including hotel facilities, shopping, entertainment complexes, restaurants, and a casino. The company also owns a casino in London, but it is Crown’s 33% joint venture with Melco Crown Entertainment in Macau that has piqued market interest.  In early January 2014 analysts at JP Morgan, Deutsche Bank, UBS, and BA-Merrill/Lynch all maintained Buy or Overweight recommendations and raised target prices for CWN, citing both growth in Macau and the declining AUD.  

In May 2013 Crown sold its stake in Echo Entertainment Group (EGP), a rival for additional casino operations in Sydney.  The stock dropped but recovered and has been rising ever since.   Here is a one year chart for CWN:

Analysts at Citi and Credit Suisse are less enthusiastic with Neutral and Underperform ratings over concerns about the potential of increased taxation in Crown’s Melbourne complex.  

Crown emerged victorious from the Sydney battle with Echo Entertainment Group (EGP), formerly held by gaming operator Tabcorp Holdings (TAH), over a new casino versus an expansion of Echo’s existing casino complex in Sydney.   In 2011 Tabcorp decided to shed its casino operations to focus strictly on gaming and Echo was born.  EGP has not fared well since it began trading on the ASX.  Here is a five year chart for EGP, showing price movement since it began trading as a separate entity:

Echo had operated four casino/hotel complexes with locations at Sydney, Gold Coast, Brisbane and Townsville, with the Townsville property recently sold to a privately held operator.    The company reported Half Year results in early February, showing a 4.9% drop in revenues with a 30.5% decrease in Net Profit after Tax (NPAT) resulting from one-off charges.  In addition, the company surprised the market with the announcement of the resignation of the company’s Chief Executive Officer (CEO).  The results prompted a downgrade from Hold to Reduce at CIMB Securities.  Echo is again battling with Crown, this time for approval of a new casino complex in Brisbane and CIMB commented on the lack of news from Echo on the status of the proposal.  On the other hand, Credit Suisse upgraded EGP from Neutral to Outperform in the belief Echo will win the Brisbane battle and called the stock “the cheapest casino operator in the world, based on the stock trading at around 6 times its FY 2015 forecasts.”  Prudent investors might be wise to await the management changes at EGP before jumping on board.

SkyCity Entertainment Group (SKC) is a New Zealand based operator of integrated casino complexes in Auckland and Hamilton in New Zealand, and Adelaide and Darwin in Australia.  All four have monopoly regulatory status.  The company has an $800 million dollar expansion plan underway for the Adelaide and Auckland properties, with management stating there will be no capital raise needed to fund the project.  SKC has the lowest forward P/E of any stock in our table with a respectable earnings growth forecast to go along with a solid dividend yield.  However, the dividend is unfranked.  In December of 2013 SkyCity joined the ASX 200 but a subsequent profit warning dampened investor enthusiasm.  Half Year results released on 12 February 2014 were down across the board.  

Although the stock price remains slightly positive year over year, shareholders have had a bumpy ride, as evidenced by the one year price chart for SKC:

Amalgamated Holdings Limited (AHL) is a broadly diversified entertainment and leisure company with operations ranging from cinema to hotels to resorts to bars and restaurants and a wildlife resort.  None of the hotels have casinos.  Full Year 2013 earnings released last August were solid.  Revenue was up 2.1% while NPAT rose 9.8% along with a 3% increase in dividends.  The dividend is fully franked.  Although the company has no analyst coverage from major broking houses and only two analysts in total following the stock, long term shareholders have done well, with the share price on a steady rise following the GFC.  Here is a ten year chart for AHL:

Village Roadshow Limited (VRL) and Ardent Leisure Limited (AAD) are similar in that both are international in scope and operate strictly in leisure and entertainment endeavors without hotel properties.  Both operate theme parks.  Village Roadshow is also a major cinema operator and distributor as well as a producer of original cinema, with its best known entries being The Great Gatsby and the Matrix Trilogy.  The company is expanding its cinema production efforts into China.  

In addition to its theme parks Ardent Leisure operates marinas, family entertainment and bowling centers, and health clubs.  In total, the company operates 139 leisure related properties here and in the US.  While both VRL and AAD have handsomely rewarded shareholders over time, VRL has outperformed.  Its ten year total shareholder return is 26% versus 16% for AAD and the five year return also outperforms, with 68% for VRL and 29% for AAD.  In addition, Village Roadshow’s dividend is fully franked, while Ardent’s is not.  Here is a ten year price chart for the two companies:

Reef Casino Trust (RCT) owns and leases a single property – the Reef Hotel Casino complex in northern Queensland at Cairns.  The complex is substantial, with a nightclub, gaming machines, table games and a hotel offering conference and banqueting facilities, spas, and even a sports arena.  The dividend yield is attractive and has maintained stability over the last three years, but it is unfranked.  The average annual rate of total shareholder return, however, has been very solid – 27.5% over five years and 15.4% over ten years.  The stock price struggled to recover from the GFC but began an upward trend in 2012.  Here is a five year chart for RCT:

The stock price shot up dramatically on 13 November 2013 following the announcement of a takeover bid from a private billionaire for $4.354 per unit in the property trust, which is essentially the same as a share.  Prior to the announcement RCT closed at $2.72 and reached an intraday high the day of the announcement of $4.10, closing at $3.99 (adjusted closing price accounting for dividends and splits was $3.81.)

A tiny stock like RCT with only one analyst covering the stock with a Buy doesn’t warrant much attention so although preliminary reports were the takeover bid could be accepted, there has been no additional news.

SeaLink Travel Group (SLK) made its debut on the ASX on 16 October 2013 following its Initial Public Offering (IPO) with a price of $1.10.  The stock opened at $1.51 and closed at $1.50.  The company is a tourism and travel company, providing seabourne transport services for freight and regular customers, as well as a full service tour operator through its SeaLink and Captain Cook Cruises.   The company operates in the Northern Territory, New South Wales, South Australia, and Queensland.  

SeaLink appears to be a company on a mission, based on the flood of positive press releases since going public.  Its managing director won a major award from the South Australia Tourism Bureau; the company signed an agreement to provide additional ferry service in Sydney from its fleet; a new vessel was added to the fleet and completion plans for a new passenger terminal at Kangaroo Island were announced; Captain Cook Cruises was selected as the operator of no-cost cruises to the Sydney Exhibition Centre.  All that took place in November 2013.  In the first month of 2014 SeaLink announced another expansion of its Sydney fleet following another contract win.

In a share market environment where many investors are starved for news of any kind, the latest press release from SLK heralded the 10% uptick in the share price, noting investors who bought in at $1.10 had already seen some capital appreciation.  News does not guarantee revenue and profits, but this small cap may be one to watch.  The stock price is up 8% from its opening price of $1.50.  Here is a price chart for SLK:

Click on the links below to read other articles from this week’s newsletter

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