Small Caps | Oct 06 2015
This story features DONACO INTERNATIONAL LIMITED. For more info SHARE ANALYSIS: DNA
-Realistic upside potential
-Minimal establishment cost
By Eva Brocklehurst
The opening of the new Heng Sheng facility at Star Vegas, Cambodia, was attended by over 400 VIP players and should provide Donaco International ((DNA)) with a significant boost to earnings at minimal establishment cost.
The market is underestimating the potential upside from the agreement with Heng Sheng, Canaccord Genuity suspects, and the broker's conviction on the stock has increased substantially. The Heng Sheng VIP room has commenced with 30 tables and is expected to ramp up to 50. Filling excess capacity quickly was one of the key attractions of the Star Vegas acquisition, in the broker's view.
Canaccord Genuity is impressed that management has been able to deliver this new capacity so soon after financial close. The company announced the acquisition of Star Vegas early this year.
The broker's current estimates are for annualised earnings of around $10m, but that is a base case assumption. Annualised earnings could increase to $33.7m under the broker's bullish scenario.
Canaccord Genuity assumes THB3bn per month is reached over an average of seven months in FY16. The assumed split of gross revenue is 30% Donaco, 70% Heng Sheng. A total of 180 dealers across 50 tables is assumed at a cost of $500 per month.
In the bullish scenario the broker envisages the room could be 20% or more accretive to earnings in FY17, with THB9bn per month in turnover. This is still 25% below forecasts for the existing VIP tables at Star Vegas. Hence, the broker does not believe the expectation is unrealistic. Based on these bullish assumptions, FY17 earnings estimates per share increase to 15.1c, up 20.8% on existing estimates of 12.5c per share.
Canaccord Genuity has a Buy rating on Donaco and a $1.54 target, with the stock trading at a significant discount to valuation amid undemanding multiples. The broker is increasingly confident in the financial and strategic benefits of the new VIP room.
The Heng Sheng room will deliver other benefits including more efficient use of existing capacity, in turn improving the return on investment. The agreement with Heng Sheng also limits downside risk, making earnings more predictable for Donaco. One of the main attractions of the Star Vegas acquisition was the skew to lower volatility mass table and slots revenue, around 65% of the total.
The addition of the Heng Sheng facility should continue to move the company's earnings profile towards lower volatility business. Under the broker's base case estimates, total VIP table revenue from existing tables decreases to a 32% share from 35%.
Heng Sheng is a Macau-based VIP junket operator and Donaco has a 3-year agreement to establish the 50-table room. Donaco has spent $750,000 on the fit-out and employed 90 mandarin speaking dealers for the opening. There is no cap on table numbers at Star Vegas and, therefore, no additional licensing requirements. Heng Sheng will guarantee a minimum of THB3bn in turnover per month, beginning in December.
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