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Donaco Well Placed To Deliver On Targets

Small Caps | Oct 27 2015


-Considerable upside from Heng Sheng
-Superior property offering in Cambodia
-Some slippage in cross-border visits


By Eva Brocklehurst

Casino operator Donaco International ((DNA)) has delivered a strong September quarter, adding to its status with brokers as its Heng Sheng facility begins operations with a flourish.

Earnings are in line to meet or exceed Bell Potter's first half forecasts, with momentum particularly noticeable at the Star Vegas property in Cambodia. The new Heng Sheng facility marked ten days in the quarter and this is expected to make an even more meaningful contribution in the second quarter. Postponement of marketing activities such as moving a baccarat tournament for VIP players to October also reinforces the broker's positive view of the current quarter.

Star Vegas earnings for the September quarter were $18m and Bell Potter forecasts $36m for the first half. The broker upgrades estimates for FY16 and FY17 by 0.2% and 1.2% respectively.

Also, as a result of a better overall win rate and lower employee equity grants from cancelled options, reported profit is up over 13% versus the broker's previous estimates. Bell Potter retains a Buy rating and increases the target to $1.60 a share from $1.45.

Canaccord Genuity has re-visited Star Vegas following the opening of the Heng Sheng room. The broker remains convinced there is considerable upside. The current share price is not reflecting cash flow and growth potential nor the agreement wit Heng Sheng. This agreement adds a base level of earnings which improves predictability. Canaccord Genuity retains a Buy rating and $1.54 target.

The September quarter result was 7.0% above the broker's estimates, driven by organic growth and an above-theoretical win rate at Star Vegas, as well as the weaker Australian dollar. The first quarter performance represents around 48% of the first half estimates. so puts the company on track to meet Canaccord Genuity's estimates for FY16 earnings of $117m. The broker considers the stock metrics undemanding relative to its growth profile and earnings upside.

At the Aristo in Vietnam, rolling chip turnover was 20% lower than the broker expected but the miss is attributed to the implementation of lower table limits in an effort to improve the win rate. Canaccord Genuity also believes the results demonstrate the benefit of the company's diversification strategy. Given the natural skew in earnings to the second half for both casinos, and the ramp up of the Heng Sheng room, the broker expects a stronger second half.

Canaccord Genuity is of the view that the Star Vegas is the superior property among the seven casinos in the region. Donaco has added an additional 185 slots to the floor since the broker was there last, filling unused space, and this is expected to drive growth in the current quarter. The facility is visibly of higher quality although the competition has been noticeable for its refurbishing efforts and expansion of hotel rooms.

The broker notes hotel occupancy is strong with room availability limited. Many Heng Sheng customers are not staying at the Star Vegas but at the nearby Star Paradise, not owned by Donaco.

One negative aspect the broker observed is that border controls between Thailand and Cambodia have been tightened since the bombing in Bangkok in August and this has taken some steam out of the number of visits to the casinos in Poipet.

See also, Earnings Upside On The Cards For Donaco on October 6 2015.

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