Tag Archives: Gaming

article 3 months old

Weekly Broker Wrap: Global Outlook, Resources, Building Materials, Gaming And Electronics

-Global economy vulnerable to shocks 
-Central banks likely to ease further
-Resource equities lag general market
-Morgan Stanley more optimistic on Boral
-Gaming stocks below Deutsche's valuation
-Strong outlook for JBH and HVN

By Eva Brocklehurst

Global Outlook

Morgan Stanley is no longer looking for an acceleration in global growth in 2016. The risk of a global recession has increased and the broker attaches a 30% probability to the event. Solid spending, subdued oil prices and expansionary monetary policy counter the likelihood of recession, but the global economy in a low-growth environment remains vulnerable to shocks as well as a broad range of geopolitical risks, in the broker's opinion.

A stable growth rate of 3.0% on downwardly revised forecasts reflects a slowing in developed markets, led by the US, and a stabilisation in emerging markets, led by Russia and to a lesser extent India. The broker does not expect a recession but the declining impact of lower oil prices and easier monetary policy is becoming a concern.

The broker now only expects one rate hike from the US Federal Reserve in late 2016, an additional 10 basis points cut from the European Central Bank (ECB) and a 20 basis points cut from the Bank of Japan before the July elections. Both the Chinese and Indian central banks are expected to ease later than previously envisaged.

AllianceBernstein is of the view that the global economy is still growing modestly. Developed economies are expected to expand slightly faster this year at 2.2% compared with 1.6% last year. Developing economies are expected to grow 3.8% in 2016 versus 3.4% in 2015.

Nevertheless, the lacklustre environment and low inflation is likely to force central banks to ease further, with the analysts highlighting the experiment in several cases with unconventional policy and negative interest rates. Both the ECB and Bank of Japan are expected to push rates deeper into negative territory.

The wild card is China. The analysts note strong capital flows point to more currency weakness, while increases in credit use and the rebound in spot commodity prices for industrial materials suggest that the economy might be in the process of bottoming. AllianceBernstein expects that China will overcome this soft patch in its economy and post growth of over 6.0% this year.

Global Resources

Pengana Capital asks whether the recent rally in resources is sustainable. First glance suggests commodity prices have run too hard, too fast. Prices could fall back but the analysts are mindful that prices are now equivalent to levels seen in 2004, some 12 years ago. This generates the observation that the Chinese economic boom, which drove prices higher, could be construed as never taking place.

However, resource equities have lagged in the run-up in commodities. Industrials, financials and technology sectors have outperformed resources by nearly 100% over the last few years, the analysts contend. Hence, much of the pessimism appears to be priced into resource stocks and much of the optimism priced into general equities.

The analysts suggest it may be time for the relationship to normalise. Moreover, structural shifts in the US economy, with market expectations going from a potential for four US rate hikes in 2016 to just one, suggest that the undervalued resources sector could be a beneficiary.

Building Materials

Current conditions in south east Queensland appear robust to Morgan Stanley. Price growth in the Brisbane apartment market is slowing and interstate investors remain dominant, given the attractive entry point and strong yields.

Underlying demand, nonetheless, is weak, and the job market relatively poor, so this comes with risks on a 24-month view. The Gold Coast is strong ahead of the Commonwealth Games construction program.

Morgan Stanley expects concrete volumes to remain at high levels and while apartment activity may slow nationwide, some major projects such as the Kingsford Smith Drive upgrade and northern NSW Pacific Highway are expected to sustain activity for the next 2-3 years.

Morgan Stanley is incrementally more positive on the outlook for Boral ((BLD)), given the likely sustainability of the strengthen in south east Queensland. Queensland account for 22% of the company's revenue from construction materials and cement. Morgan Stanley forecasts a 10 basis point improvement in margins across FY16-18.


Deutsche Bank is positive on the gambling sector, given its robust earnings forecasts and sound balance sheets. The broker expects expenditure on gaming domestically will continue to benefit from low interest rates, high property prices and stable employment. Casino operators are also benefitting from Chinese tourism.

All gaming stocks are below the broker's valuations although Aristocrat Leisure ((ALL)) and Star Entertainment ((SGR)) remain preferred exposures. Value is also seen emerging at Tabcorp ((TAH)) and Tatts Group ((TTS)).

CrownResorts ((CWN)) is boosted by the prospect of a corporate restructuring which could involve a bid for the remainder of the company by James Packer. Deutsche Bank retains a Hold rating on the stock.

Consumer Electronics

Harvey Norman ((HVN)) and JB Hi-Fi ((JBH)) are both enjoying sales momentum in Australia. Deutsche Bank expects this to persist, with housing volumes and the wealth effects a tailwind. Relative to the population, housing starts are not seen at record levels and the broker believes the recent surge in construction is merely a catching up after decades of limited growth.

The exit of both Dick Smith and Masters should deliver meaningful benefits as well. The broker estimates Masters will vacate $120m in appliance market share as a complete shutdown is the most likely scenario. Apportioning the sales by existing market share suggests Harvey Norman is the largest beneficiary, with a boost of 0.7% expected to Australian sales.

In terms of Dick Smith's closure, JB Hi-Fi is expected to benefit with a 10% sales uplift, Harvey Norman 6.0% and Officeworks ((WES)), 3.6%.

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Weekly Broker Wrap: Banks, General Insurance, AirXpanders, Pokies And Tourism

-Bell Potter dismisses bank stress talk
-Youi gains scale, insurer margins pressure
-AXP at the door of US potential
-Oz slot manufacturers well placed
-Chinese visitors to Oz accelerate


By Eva Brocklehurst


Bell Potter suggests some of the negative speculation surrounding the value of bank stocks is simply more posturing than substance. Australia's GDP remains strong, spreads are rising, costs are being managed and asset quality is stable.

The broker's analysis of movements in off-balance-sheet liabilities, as a leading indicator of stress, suggests stable asset quality trends for some time to come. Recent raising of capital suggests the Australian banks are now in the top quartile of their global peer group.

Bell Potter observes bank sector dividends have gone backward on only three occasions in the last 37 years. This includes following the 1987 crash, the early 1990's recession and the 2007/8 Global Financial Crisis. Reasons for this occurring included poor credit risk practices in commercial lending and unique economic events such as external liquidity shocks

This is not the case now and the banks have improved their liquidity positions since the GFC. Bell Potter's forecasts are unchanged. As a result of very strong share price performance in the past month, Commonwealth Bank ((CBA)) is downgraded to Hold from Buy.

The broker retains Hold ratings for Bendigo & Adelaide ((BEN)), Bank of Queensland ((BOQ)) and ANZ Banking Group ((ANZ)). Buy ratings are retained for National Australia Bank ((NAB)), Westpac Banking Corp ((WBC)), Macquarie Group ((MQG)) and Suncorp ((SUN)).

General Insurance

Youi is starting to gain scale in the Australian market, Macquarie observes, with the general insurance market consolidated, rational and profitable. Nevertheless, cost cutting strategies are required to defend profitability.

The market's growth has slowed and margins are under pressure. Macquarie notes the financial results from Youi suggest it has now captured 2.6% of the addressable market in home and personal motor insurance.

Youi achieved 22.9% growth in gross written premium (GWP) in the first half. Macquarie continues to forecast further loss of market share by the listed Australian insurers to banks and challenger brands.

Despite a bottoming in GWP growth in the market the broker observes the deterioration in margins has not stabilised. Quarterly data from the Insurance Council of Australia points to negative trajectory for premium spending on home and motor insurance.

Macquarie remains cautious about personal lines insurance outlook and notes upper corporate commercial carriers expect premium spending in this market to contract further in 2016. As a result, the broker reduces growth forecasts for Insurance Australia Group ((IAG)) and Suncorp ((SUN)).

Macquarie has also downgraded QBE Insurance ((QBE)) to Neutral from Outperform as sector conditions remain challenging. The broker acknowledges the stock could trade higher with supportive FX tailwinds and a rise in US/global interest rate expectations.

AirXpanders Inc

AirXpanders ((AXP)) offers an investment opportunity, Moelis believes, with a market leading product and a simple path to commercialisation. The company reported a net loss of US$11.2m for FY15. A favourable industry thematic supports a growing market while Australian success so far has opened the door to the US potential.

US FDA approval is expected in the June quarter. Moelis considers the valuation assumptions underpinning the stock are undemanding and its base case provides significant upside opportunity. Moelis retains a Buy rating and $1.95 target.

AirXpanders manufactures and distributes AeroForm, a medical device used in breast reconstruction after cancer which has been approved for sale in the Australian market.


Following a survey of the US slot machine market, Ord Minnett has concluded that Australian manufacturers, Aristocrat Leisure ((ALL)) and Ainsworth Gaming Technology ((AGI)) are well positioned.

Aristocrat is the main beneficiary, with 66% of participants in the survey suggesting that it is the top performing manufacturer. The broker also expects Ainsworth will grow sales as its profile builds. Ord Minnett reiterates an Accumulate rating for both stocks, with a target of $10.75 for Aristocrat and $3.25 for Ainsworth.


The annual growth rate of international visitors to Australia in December was 7.9% while visitor expenditure in the month grew 17.7% annualised. Bell Potter also notes international airline activity signals both outbound and inbound passengers in December grew 5.4%. In the light of the data the broker takes a look at where Chinese visitors are spending time in Australia.

The data indicates Sydney and Melbourne remain the most popular cities. Chinese visitors to Melbourne have accelerated by 27% in the last 12 months, while Sydney is also up 20%. Numbers to the Gold Coast and tropical north Queensland suggest a recovery is under way over the past two years after a weak 2013.

Chinese visitor numbers to these tourist areas are more volatile than in the larger cities as, given the smaller visitor base, large swings can have a large impact in percentage terms. The broker also points to the fact that airline capacity to these destinations has been subject to material change and this is a key driver of numbers.

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Star Entertainment Well Oiled

By Michael Gable 

OPEC had their meeting on Friday and, little surprise to us, nothing came of it and therefore the price of oil is tumbling again. So as we've done for the last year, we continue to advise that new investment in energy stocks is undesirable. However, we need to continue to realise the benefits that low oil prices will have on other companies. It is important to be aware of these major themes. To avoid the losing sectors, as well as identifying the winners. We've previously mentioned the benefit it will have to increased tourism and spending money and one such stock that is benefiting from increased spending and VIP patronage is The Star Entertainment Group ((SGR)), formerly Echo Entertainment Group. We have covered it in some detail this week and the chart is also looking as interesting, as are the fundamentals.

SGR shares have been trending higher since 2014 and the recent pause is still respecting that uptrend. It looks like that pause has occurred as a little 3-wave correction against the trend, such as the one seen at the end of 2014. After an impressive jump up in mid November, they have just been treading water here while the market eases back. There is a chance that SGR drifts back towards $4.60 again but the price action suggests it is more likely to have a go at $5 and if it can clear that on a weekly basis, then we should see it move to a new high.

Content included in this article is not by association the view of FNArena (see our disclaimer).
Michael Gable is managing Director of  Fairmont Equities (www.fairmontequities.com)

Michael assists investors to achieve their goals by providing advice ranging from short term trading to longer term portfolio management, deals in all ASX listed securities and specialises in covered call writing to help long term investors protect their share portfolios and generate additional income.

Michael is RG146 Accredited and holds the following formal qualifications:

• Bachelor of Engineering, Hons. (University of Sydney) 
• Bachelor of Commerce (University of Sydney) 
• Diploma of Mortgage Lending (Finsia) 
• Diploma of Financial Services [Financial Planning] (Finsia) 
• Completion of ASX Accredited Derivatives Adviser Levels 1 & 2


Michael Gable is an Authorised Representative (No. 376892) and Fairmont Equities Pty Ltd is a Corporate Authorised Representative (No. 444397) of Novus Capital Limited (AFS Licence No. 238168). The information contained in this report is general information only and is copy write to Fairmont Equities. Fairmont Equities reserves all intellectual property rights. This report should not be interpreted as one that provides personal financial or investment advice. Any examples presented are for illustration purposes only. Past performance is not a reliable indicator of future performance. No person, persons or organisation should invest monies or take action on the reliance of the material contained in this report, but instead should satisfy themselves independently (whether by expert advice or others) of the appropriateness of any such action. Fairmont Equities, it directors and/or officers accept no responsibility for the accuracy, completeness or timeliness of the information contained in the report.

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Echos Of The Past In New Brisbane Casino

-Favourable licence terms
-Demographics supportive
-Seen wining VIP regional share


By Eva Brocklehurst

A new project heralds a new company name, with The Star Entertainment Group ((SGR)), formerly Echo Entertainment, launching its Queens Wharf casino development in Brisbane. The company became the preferred developer/operator in July and has now finalised the agreements with the Queensland government.

The licence term is 99 years with 25 years of exclusivity for a 60 kilometre radius from the site. The Star Entertainment's project capex budget for Queens Wharf is $1bn with earnings expected to flow from 2022. Goldman Sachs expects strong incremental revenue emanating from increased Chinese tourism to Australia and an increasing share of the regional VIP market amid a reduction in smaller domestic operators such as pubs and clubs.

No earnings or returns targets have been identified but the company expects the returns will cover its targets and deliver value to shareholders.

Partners, Hong Kong based Chow Tail Fook and Far East consortium will generate referral fees for VIP business directly passed to Queens Wharf. The Star Entertainment will own 50% of the project and operate a resort as part of the development in return for a fee, expecting to receive around 60% of the cash flow generated by the integrated resort.

The company will continue to operate the Treasury casino and will have three months upon opening of Queens Wharf to transfer that building's current casino operations, whereby Treasury will become a non-gambling retail and accommodation facility.

The Star Entertainment will will retain ownership of the casino and hotel buildings under a long-dated lease. Management has indicated it expects VIP revenue to be marginally lower at Queens Wharf than it is at the The Star casino in Sydney. 

The company has been granted a maximum of 2,500 electronic gaming machine licences, above the current Treasury casino allocation of 1,450. Unlimited MTGM (multi terminal gaming machines) and table licences have been granted, consistent with the current licence.

The integrated resort/casino and residential tower will be connected to Brisbane's Southbank precinct via a walk bridge. The next step for the consortium is obtaining planning approval, expected in the second half of 2016. Construction is expected to start in 2017.

Morgan Stanley retains an Overweight rating on the stock, comfortable with the increased domestic returns that are being driven by demographic shifts amid optimism Australia will continue to win global VIP market share, benefitting from weakness in Macau. The broker forecasts FY15-18 compound earnings growth of 14%.

Deutsche Bank finds the parameters of the project positive for the company, especially in relation to the capital requirement, licence terms and management agreement. The broker expects it will generate revenue of $1.13bn and a pre-tax return on capital of 13.8%.

The company is also expected to fund its share of capital requirements from cash flow and debt. Deutsche Bank increases earnings forecasts by 1-2% to reflect the new details.

Goldman Sachs, not one of the eight brokers monitored daily on the FNArena database, has a Neutral rating and $4.70 target. The broker also envisages the company can fund its investments in Jupiter's, The Star and Queens Wharf without the need for additional equity.

The database has five Buy ratings and two Hold for the stock. The consensus target is $5.71, suggesting 16.6% upside to the last share price.

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Weekly Broker Wrap: Small Caps, El Nino, Telcos, Slots And Warehousing

-Domestic economic tailwinds elusive
-Insurers benefit from El Nino
-Value adding to mobile plans continues
-Aristocrat dominates slot machines
-Warehousing growth to benefit GMG


By Eva Brocklehurst

Queensland Conference

Morgans notes domestic tailwinds are more elusive than usual at its Queensland conference, which featured 36 companies across several sectors. Housing and service sectors are working hard to take up the reins after the mining boom while Australia is navigating a period of soft growth.

Several businesses, such as IPH Ltd ((IPH)), Silver Chef ((SIV)) and Lovisa ((LOV)) are looking to grow offshore, while AP Eagers ((APE)) is seeking innovative digital strategies to grow its market share in the automotive industry. Meanwhile, enablers of digital technology such as Rhipe ((RHP)) and NextDC ((NXT)) are obtaining benefit from the way corporates handle and store data.

The broker notes Australian food products are being sought from exporters such as Capilano ((CZZ)) and, indirectly, Elders ((ELD)). Inbound tourism also appears to be thriving and driving expansion for Echo Entertainment ((EGP)) and Mantra Group ((MTR)).

Morgans believes, over the next 40 years, as the population ages, demand will increase substantially for health care, travel and wealth management. Servicing this model are Flight Centre ((FLT)), Gateway Lifestyle ((GTY)) and Japara Health Care ((JHC)).

Morgans highlights AP Eagers, Aveo Group ((AOG)), IPH and Vitaco ((VIT)) as its key selections from the conference.

El Nino

This summer promises one of the strongest El Nino events since 1950, with a large negative impact being widely canvassed for eastern seaboard harvests. The impact of El Nino on rain and temperatures varies by region but Macquarie highlights, with a few notable exceptions, the insurance sector is more favourably placed.

In general, capital goods companies are negatively impacted, regardless of region, while materials sector companies have mixed fortunes. This does mask differences, the broker concedes, between those companies with exposure to hard commodities and those with exposure to agriculture.

Specifically, companies facing downside risk include Incitec Pivot ((IPL)) and Nufarm ((NUF)) as materials suppliers. GrainCorp ((GNC)) and Murray Goulburn Unit Trust ((MGC)) would be adversely impacted by reduced yields.

Bell Potter suggests the good news from an El Nino event is for lower insurance losses and the strong event that is forecast for this summer may signal loss ratios could be down to almost 60%. The event means lower rainfall and delayed tropical monsoons .This signals increased bushfire risk but fewer cyclones.

The broker also observes there is very little correlation between El Nino and bad debts in agribusiness. While isolating flood and drought impacts is difficult, Bell Potter believes floods tend to have a larger adverse impact on banks.

Assuming the El Nino arrives and increased hail activity, which is also a feature, is not concentrated in metro/CBD regions, the broker's analysis indicates very little impact on the insurers and banks in general.

Telco Pricing

Telstra ((TLS)) has raised handset subsidies on 24-month plans this week, by reducing iPhone 6S handset pricing. Goldman Sachs believes Telstra is responding to increased competition since the iPhone 6S was launched. This heightened competition, if sustained, could be negative for industry margins, the broker suspects.

Telstra also continues to add value to its plans in fixed broadband, with bonus data and the inclusion of Telstra TV on $119/$149 plans. The broker observes telco advertising spending grew 12.5% in September, versus a slump of 2.8% for the broader advertising market.

Slot Machines

Aristocrat Leisure ((ALL)) continues to dominate gaming machine performance in the September quarter, with UBS noting it was performing well ahead of its peers. The company appears to be retaining its installed base market share across the eastern seaboard.

New products from Ainsworth Game Technology ((AGI)), IGT and Sci-Games have entered the market and it seems to the broker, while early days, that Ainsworth's games are gaining traction ahead of the other new entrants. Ainsworth is growing its installed base share at the fastest pace relative to peers, although UBS observes momentum has slowed.

UBS estimates Australia will represent around 16% of Aristocrat's segment earnings in FY16, versus 27% in FY14, but it remains an important market, being the second largest regulated class III video slot market behind North America.


Demand for modern warehousing is a global growth trend which Macquarie notes is led by three key operators, Prologis, Global Logistic Properties and Goodman Group ((GMG)).

Goodman is Macquarie's preferred stock to play the theme as it has a well managed capital structure, geographic diversity and superior returns. 2016 supply additions in Japan will be at the highest level in 10 years.

Despite a spike in vacancy rates and decline in spot rents, Macquarie is not concerned about the impact because of Goodman's approach to staging additional supply. Similarly in China, while supply is set to accelerate, net absorption is also likely to remain high.

In the current environment, Macquarie observes Goodman offers higher free cash flow and dividend yield versus Global Logistic, which is listed in Singapore, although the latter is considered more attractive on a relative net asset valuation.

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Donaco Well Placed To Deliver On Targets

-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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article 3 months old

Earnings Upside On The Cards For Donaco

-Realistic upside potential
-Improved predictability
-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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Weekly Broker Wrap: Oz Housing, Jobs, Wagering, Telecoms And Utilities

-Is Oz house construction peaking?
-RBA's cash rate key to housing
-Strong jobs, weak wages
-Wagering set for solid growth
-Accelerating mobile revenues
-GS prefers SKI, DUE for yield


By Eva Brocklehurst

Australian Housing

Housing is one of the few bright spots in the economy but this is set to change. Much attention has been given to price rises in Sydney but construction, too, is in a sizeable upswing. Dwelling construction has added half a percentage point to GDP growth over the past year, offsetting part of the percentage point drag from weaker business investment. Alliance Bernstein suspects this might be as good as it gets. Underlying demand for new housing to meet population growth has slowed to 120,000 per annum from 180,000. While there was a prolonged period of under-building this has now swung to over-building. At the end of the year it is likely that housing construction will be running above 6.0% of GDP, a level not seen since the early 2000's.

Rental growth has slowed to just 2.0% now from mid to high single digits in 2008/09. House price growth outside Sydney has slowed too. Growth in Perth and Brisbane is now negative. Alliance Bernstein also believes there is a technical "wild card" to consider. An historically disproportionate share of the upswing is multi-storey apartments and a lot of this activity is driven by foreign investors. With greater scrutiny of the rules there is potential for a change in this area. Alliance Bernstein is not suggesting a housing collapse, particularly as the upswing has not been accompanied by rampant growth in credit. Still, it is considered inevitable that there will be a downturn by mid next year.

UBS also grapples the issue of whether housing is in a bubble. In the broker's opinion the main driver of a stronger-for-longer home building boom is the Reserve Bank's cash rate staying at current levels for another year. It remains at a record low 2.0%. This is the key catalyst for housing approvals, not supply or unemployment, UBS maintains. UBS expects record commencements in 2015 and 2016, which should allow supply to catch up to demand but only making a small dent in the under-building which has accumulated over some years.

UBS agrees that the record high investor/medium-density share of the upswing is a risk but believes this is suppressing rents rather than prices, as unemployment is not spiking. Regulation is also not seen as a material dampener of demand in the months ahead. Moreover, amid record low interest rates, the mortgage repayment share of income is around average. Hence, while there are bubble-like features in the current cycle, UBS does not observe any trigger that will pop them in the near term.


UBS asks the question whether the latest data on employment from the Australian Bureau of Statistics can be believed. As this is a survey covering only 0.32% of the population the 95% confidence interval range on jobs is large at 166,000 month on month. In May, jobs growth doubled and unemployment fell to a one-year low of 6.0%. Hours worked were flat and strong growth in Western Australia meant its unemployment rate fell back to the lowest among the major states, which does not fit with the mining downturn. Gains have also been unusually concentrated by industry.

UBS suspects, amid the negative income shock from the terms of trade, labour market flexibility is allowing for much of the necessary adjustment via wages rather than job numbers. Wage rates are growing at a record low rate, GDP-based employee compensation is below 2.0% and company profits are flat, which indicates a large degree of labour market slack. However, it suggests unemployment should be rising not falling. The broker suspects the reality is somewhere in between. The US experience after the GFC revealed there an be a prolonged period of job retention coinciding with weak wages.


Morgan Stanley lifts medium-term wagering growth assumptions. The broker believes the market is underestimating the positive changes occurring in the industry. This include mobile usage, competitor consolidation, race field fees and fixed odds betting, with operators intent on innovation instead of price wars. The broker expects the industry to grow at 7.0% for 2016 and 2017 versus a rate over previous years more like 3-4%.

Product innovation and advertising spending should drive both penetration and spending frequency. Morgan Stanley's survey also suggest younger players are more likely to bet online on sports. Tabcorp ((TAH)) and Sportsbet will be the main beneficiaries of improved industry economics, in the broker's opinion. 

The introduction of "in-play" betting via the internet should grow total turnover and revenue in Australia's wagering market, in Macquarie's opinion, given evidence from European operators that it can generate increases in sports wagering. Macquarie believes online corporate bookmakers have been gradually eroding the retail advantage of Tabcorp and Tatts ((TTS)). While a relaxation of the rules is considered inevitable, Macquarie does not factor this into forecasts at this stage. Still the whole industry is well positioned for the uplift from online and this underpins the broker's Outperform ratings on the latter two stocks.

Mobile Services

After some years of low returns the Australian mobile industry is delivering returns approaching the cost of capital. All operators appear to be participating in accelerating revenues. Capital intensity has continue to rise but the industry has benefitted from cost cutting and improved pricing power following consolidation.Goldman Sachs expects operators to retain their price discipline. The broker's analysis provides greater confidence in continued multi-year mobile industry growth. Telstra's ((TLS)) service revenue forecasts are retained and this is expected to underpin low single digit group earnings growth over FY15-16.


Goldman Sachs recently met management from five Sydney-based utilities.The broker notes Origin Energy ((ORG)) has been volatile with an increased focus on the potential for LNG oversupply. The company is upbeat about its retail margin outlook and increased pricing power in NSW. The broker continues to believe oil prices and the start of Sinopec deliveries will be key for the company. AGL Energy ((AGL)) is optimistic on electricity pool prices as Gladstone LNG will ramp up exports through FY16. Goldman notes there is too much regulatory uncertainty for the company to confidently invest in more wind capacity.

APA Group ((APA)) is considered well positioned to take advantage of its opportunities, although growth appears priced in. Spark Infrastructure ((SKI)) plans to bid on the three NSW network utilities and any transaction here would be highly material to growth, although Goldman Sachs emphasises the multiples paid will be important. DUET Group ((DUE)), meanwhile, has been short listed for the NT link project and could be in a position to buy Chevron's Gorgon domestic gas pipeline if sold. The broker prefers the latter two stocks because of the superior near-term yield.

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article 3 months old

Weekly Broker Wrap: Supermarkets, Automotive, Pharma And Banking

-Higher yields no threat to equities
-Price war looming in supermarkets?
-Oz departures slow sharply
-Pharma wholesalers need diversity?

-Automotive dealers stretched?
-Donaco's Star Vegas on track

By Eva Brocklehurst

Australian Equity Strategy

As long-term interest rates push higher UBS does not envisage a significant sell-off in the bond market. The broker expects equities can cope with a modest rise in yields spaced over the next six to 12 months. The broker considers the Australian dollar retains downside potential which should be good for Australian market earnings. The broker has trimmed its year-end target for the ASX200 to 5,800 from 5,900, given headwinds emanating from banking and mining. UBS is overweight US dollar earners, housing construction plays and energy stocks.

Supermarket Tracker

Wesfarmers' ((WES)) Coles supermarkets have extended their lead over Woolworths ((WOW)) in UBS' survey. The broker's proprietary survey of the Australian food and liquor market revealed Woolworths score is at its lowest level since the survey began in 2007. In contrast, Coles score was its highest ever. Coles now leads Woolworths in 25 out of 26 categories. Coles is observed winning the marketing war and executing better.

Of most concern to the broker are declines for Woolworths across customer-facing areas, such as value for money, in-store execution and the effectiveness of promotional campaigns. It will take time and money to fix the problems too. UBS maintains that when the number one player is under pressure, major changes to its strategy can cause disruptions across the market.

UBS maintains Woolworths needs to lift morale and with a new CEO that is not attached to margins, amid increasing competitive intensity, the risk is for a price war, with Woolworths going harder and earlier than the market expects.

Overseas Holidays

It could well be the end of cheap overseas holidays for Australians, given the Australian dollar's recent depreciation to a six-year low. Departures from Australia slowed sharply to just 2.0% year on year recently from average growth of 10% over 2003 to 2013. In contrast, arrivals accelerated to a decade high rate of 5.0% after being almost flat from 2005-2013. UBS notes the change in net arrivals is the most positive since the 2000 Olympics and should support consumption, given weak nominal household income. The broker maintains that in a sub-trend economy which lacks domestic drivers, tourism is a welcome bright spot. This view is supported by forecasts for the Australian dollar to fall further by the end of the year.

Automotive Dealers

The valuation of automotive dealers is starting to look stretched to Credit Suisse, although Neutral ratings are retained. industry conditions have supported both AP Eagers ((APE)) and Automotive Holdings Group ((AHG)). AP Eagers has the benefit of no direct Western Australia exposure, with a greater skew toward Queensland. NSW is a key area of strength for the dealership. Earnings momentum is seen favouring AP Eagers over Automotive Holdings. if AP Eagers is fairly valued then Automotive Holdings is probably too cheap, Credit Suisse reasons. That said, AP Eagers needs continued upgrades to justify its rating, the broker adds, while a positive surprise could drive a re-rating for Automotive Holdings.

Pharmaceutical Wholesalers

The passage of the Pharmaceutical Benefits Scheme package through the Australian Senate means a material reduction to spending and, hence, wholesaler reimbursement over the next five years. Credit Suisse expects listed wholesalers, Australian Pharmaceutical Industries ((API)) and Sigma Pharmaceutical ((SIP)) to fully offset the impact to profits by winding back pharmacy trade discounts. Beyond this, should prices continue to fall they will need to reduce operating costs or diversify away from PBS medicines to sustain earnings at current levels.

Domestic Banking

Household banking fee data released by the Reserve Bank of Australia has shown growth for the second consecutive year, following two preceding years of no growth. The main contributor to the 1.5% growth figure was credit card fees (1.9%) while housing fees continued to drag (-0.6%). Macquarie believes the trend points to more rational behaviour and will sit well with shareholders of the major banks as they look to implement strategies to claw back lost returns from the impending increase to mortgage risk weights. The broker notes re-pricing of mortgages has begun and the retail banks are best placed to benefit.

National Australia Bank ((NAB)) has also been progressively re-pricing deposits. Should these re-price to peer-average levels this may boost earnings by 0.6%, Macquarie contends, with potential to create longer term shareholder value.

Donaco International

Donaco International ((DNA)) has signalled its Star Vegas transaction will be completed by next month. Canaccord Genuity views completion of the transaction as a positive catalyst as the company diversifies its revenue base and risks. The Star Vegas acquisition is the primary driver of the broker's forecast earnings growth in FY16, as the company increases its exposure to Asian consumption. Canaccord Genuity has a Buy rating and price target of $1.25

Bell Potter also has a a Buy rating on the stock, with a $1.36 target. The broker observes completion of the acquisition was a key concern and, with the transaction update, Star Vegas now appears on track. Bell Potter also notes an extra US$20m working capital facility is now being sought because of a persistently low win rate at Aristo Hotel. Visits are strong and occupancy is a record 75% but the actual win rates remains weak. The broker suspects the company has had a run of bad luck but that this should soon change.

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article 3 months old

Weekly Broker Wrap: Housing, NZ Banking, A-REITs, Retailers And Casinos

-Slight easing of Oz investor housing finance
-Dairy, Auckland prices key to NZ bank outlook
-Low bond yields support A-REITs
-Key exclusions from supermarket LFL sales
-Strong cash profit likely for Donaco


By Eva Brocklehurst

Housing Lending

Tighter availability of housing credit and the removal of lending rate discounts should curb investor lending growth. Analysts at ANZ suggest the changes to investor lending practices are likely to have a marginal softening impact on house sales and price growth. A number of banks have adopted a more cautious approach recently as a result of APRA's review of housing investment lending. The pullback in investor lending growth should provide some breathing space to the Reserve Bank, in the analysts' view, enabling low rates to be maintained, and support a broadening of the recovery beyond housing in the non-mining parts of the economy.

Property statistics from Australia's prudential regulator, APRA, reveal the major banks, in aggregate, grew investor housing loans by 12.2% in the year to March 2015. Deutsche Bank observes this figure is still above the 10% ceiling APRA would prefer. The broker expects a reduction in these growth rates in coming quarters given the recent actions by banks, such as the removal of pricing discretion for discounts and loan-to-value ratio caps for investor loans, as well as stricter loan criteria for non-resident lending.

Deutsche Bank observes, while the focus has been on investor housing growth, owner-occupied lending remains firm, up 6.8% in the year to March, and commercial property growth has increased to 6.5%.

New Zealand Banking

Citi observes there are two issues which are driving the banking outlook in New Zealand. One is the country's largest export commodity, milk solids, which is experiencing the softest market conditions since 2007, and the other is the Auckland housing market, which is booming. For the banks it will make earnings growth a challenge over the next 12 months. The dairy sector is a large user of debt and the biggest concern for the major banks is the concentration of that debt, with 30% held by only 10% of farms. On an individual basis, ANZ Bank ((ANZ)) has the largest exposure to the NZ agricultural sector and an even bigger share of the dairy market courtesy of former subsidiary, NBNZ.

In terms of Auckland house prices, these have appreciated 18% in the last 12 months. The strength of the market has became a concern for regulators and the RBNZ has announced a new round of measures to cool the market. From an individual bank perspective, Citi notes ASB, owned by Commonwealth Bank ((CBA)), is heavily represented in the Auckland mortgage market and its mortgage volumes have slowed considerably since the first round of RBNZ measures.

Australian Real Estate Investment Trusts

A-REITs do not appear cheap compared with history but there is a likelihood they will remain expensive for some time to come. Citi notes low bond yields are providing the support for further upside in valuations. With the spread between the cost of debt funding and asset yields at decade highs, the broker suspects interest in Australian property assets will remain high, placing further upward pressure on values. Current concerns around macro-prudential controls in the residential sector, while valid, are not expected to significantly slow down the volumes, or reduce house prices.

The broker envisages Stockland ((SGP)) and Mirvac Group ((MGR)) are well placed in this regard but for different reasons. Stockland has low exposure to investor demand while Mirvac, given current pre-sales, offers a high degree of certainty. Mirvac is upgraded to Buy from Neutral.

In the office sector the broker envisages further compression in cap rates - the ratio of asset values to producing income. Recent channel checks confirm further transactions are likely to be biased towards lower cap rates and higher asset values. Dexus Property ((DXS)) is now more attractively priced and Citi upgrades to Neutral from Sell. In retail, the broker suspects the spill over in demand will eventually lead to further cap rate compression. Citi maintains a preference for residential developers and fund managers.

Australian Retailers

One of the more scrutinised statistics in the Australian retailer sector is like-for-like (LFL) sales growth. Morgan Stanley has reviewed the bases upon which the retailers calculate this growth and finds differences exist. Woolworths ((WOW)) and Wesfarmers ((WES)) exclude the impact of new store sales cannibalising existing store sales and, therefore, they overstate LFL sales growth by 0.5-0.8%, the broker suggests. The broker notes retailers in the UK and US do not adjust for new store cannibalisation and this suggesst Wesfarmers and Woolworths are in a minority by reporting this way.

When calculating "core" growth for Woolworths, Morgan Stanley finds it has been flat since FY12, although earnings margins rose to 8.0% from 7.4% over that period. Wesfarmers' Coles has sustained a more rational store roll-out, which leads the broker to calculate core LFL sales growth is running at 2.2% for FY15. The tailwind from Western Australian deregulation, which added 0.3% growth for the major supermarkets between FY11 and FY14, is expected to fade as Aldi enters the market. Hence, Morgan Stanley finds the Australian supermarkets unattractive.

Wesfarmers' Bunnings is perhaps better off for excluding cannibalisation, with core sales growth calculated at a robust 4.0%, on Morgan Stanley's estimates. Retailers which do not adjust for this feature have higher quality LFL numbers, in the broker's view. Harvey Norman ((HVN)), JB Hi-Fi ((JBH)), Burson Group ((BAP)), Super Retail ((SUL)) and Pas Group ((PGR)). Myer ((MYR)), Premier Investments ((PMV)), Kathmandu ((KMD)) and The Reject Shop ((TRS) adjust LFL sales growth for refurbishment activity which, all things equal, acts to improve LFL sales performance.

Donaco International

Bell Potter initiates coverage of Donaco International ((DNA)) with a Strong Buy recommendation and $1.15 target. The company is an integrated casino, hotel and entertainment provider in South East Asia. The broker believes the stock will re-rate positively over the next year as the company finalises its Star Vegas acquisition. Donaco operates in low tax rate jurisdictions and has little ongoing capex requirements as well as no major debt burden.

Bell Potter estimates that over 90% of the FY18 operating profit will convert to cash profit. This is around double the average conversion rate for Crown Resorts ((CWN)), Echo Entertainment ((EGP)) and Sky City Entertainment ((SKC)). Despite this the stock trades at a significant discount to peers. Bell Potter believes this discount should close over the year ahead.

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