Tag Archives: Gaming

article 3 months old

Crown Wins Over Brokers After FY14 Flourish

-Macau drives profitability
-OZ VIP revenue rises?
-MPEL dividend incorporated
-Las Vegas clarified
 

By Eva Brocklehurst

Crown Resorts ((CWN)) scored a win against brokers in FY14, with results above most expectations. Surprising weakness in the first half, which sent brokers scurrying at the time for pencils and erasers, was reversed in the second half. Consumer sentiment may be soft but Crown appears to be winning on that front too, stating that there was an improvement in trading in the second half despite weak sentiment in Melbourne and Perth as the local economies experience structural and cyclical challenges.

The company's profitability is largely being driven by its Macau joint venture, MPEL, but trading at Australian casinos also improved in FY14. VIP revenue drove most of the uplift and now accounts for 26% of Australian revenue. As a result, brokers acknowledge volatility has increased, given the timing of visits by small groups of high value players. Melbourne's main gaming floor grew 4.3% in the second half as Crown ratcheted up marketing initiatives. Growth in Melbourne was also boosted by the hotel business. CIMB observes Melbourne VIP visits were down 33% in the first half but finished the year down only 1%. Perth hotel occupancy levels were still firm despite a softer macro environment, with revenue growth offset by lower average room rates.

Cost efficiencies that were a success at Crown Melbourne were rolled out to the Perth property and Macquarie expects gradual improvement as FY15 gets underway. Crown will shift the Australian capex focus to Perth from Melbourne, with the opening in late 2016 of the Crown Towers in that city. Sydney capex will also tick up as the Barangaroo project moves forward. Crown has now guided to a total project budget of around US$1.6-1.9bn for the Las Vegas property, providing further details on plans for that development. The market heaved a collective sigh of relief when this figure was announced. Deutsche Bank observes some had suspected the investment could be more like US$4bn.

Earnings resilience, despite subdued economic settings, and consistent domestic assets are supportive of the outlook but international growth remains key, in Macquarie's view.  Dividends may be increased, as the company revises up its policy and ties the pay-out ratio to the income stream from MPEL. Earnings from MPEL are expected to contribute 82% of total earnings by FY18, up from 52% in FY14 on the broker's estimates. A burgeoning Chinese middle class should support mass market revenue. Deutsche Bank also took comfort in the reassurance the Melco Crown dividends will be incorporated.

JP Morgan was also relieved about the Las Vegas project costs, noting Crown will take a majority stake in a highly geared vehicle and there are several risks arising from such a competitive marketplace but the funding is likely to be off balance sheet, non-recourse debt.

BA-Merrill Lynch is confident further operating leverage can emerge. Gaming spending appears slightly stronger and the company has a significant development pipeline. Some uncertainty lingers regarding Las Vegas and Brisbane but this is not enough to undermine the investment case, in Merrills' view. Meanwhile, MPEL is solid. All up, the broker believes valuation is attractive for the growth and opportunity that is on offer. Goldman Sachs focused on the positives. Main gaming revenue growth in Melbourne and Perth accelerated in the second half and VIP also improved, with Australia potentially benefiting from declining VIP table capacity in Macau. Capital commitments for Las Vegas have been clarified and the dividend pay-out policy is increased. Adds up to a Buy rating for Goldman with a $19.70 target.

On the other hand, Credit Suisse retains an Underperform rating, not because of any concerns regarding the outlook or operations but because the valuation appears full. The broker acknowledges Crown's ability to surpass expectations, even as consumer sentiment weighs. Crown is in a position to fund its numerous projects that are coming to fruition between 2017-2020 and has partners on most of these. Credit Suisse models for $1.3bn in free cash flow after dividends between 2015 and 2020, excluding effects from development projects.

In addition, proportional consolidation of the MPEL balance sheets adds around $2.0bn in debt capacity by FY18. Credit Suisse suspects the Las Vegas project is not an earnings or yield play but a capital appreciation investment. The broker has run some numbers in this regard and concludes the project is immaterial to value. The value is in the strategic potential that will underpin Crown as a global luxury casino brand. Crown may also benefit if the north end of the Las Vegas strip is built out around the Crown property.

Most brokers on FNArena's database are happy with Buy ratings. There are six. One Hold and one Sell make up the remainder. Consensus target is $19.11, suggesting 21.2% upside to the last share price. Targets range from $15.80 (Credit Suisse) to $24.18 (Merrills).

 

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article 3 months old

Weekly Broker Wrap: Fashion, Utilities, Power, Wagering And Supermarkets

-Online shopping fatigue 
-Utilities offer strong yields
-Electricity capacity for 10 years
-Merger potential of TAH and TTS
-Supermarket profit impetus waning
 

By Eva Brocklehurst

Retail sales trends in Australia have diverged. Electronics and department stores remain slow but clothing, hardware and furniture are strong. Citi considers Specialty Fashion ((SFH)) and Premier Investments ((PMV)) are the best exposed to this trend. Clothing sales are showing the effects of pent up demand after three lean years. The broker notes fashion trends are more positive and the consumer is revealing some fatigue with online shopping. Australian online growth has slowed to 9% this year from 19% a year ago. It appears consumers are back seeking that instant gratification that the store experience offers.

Citi expects sales growth will slow from October onwards as the industry laps good trends and higher house prices from the prior year. Yes, house prices. The broker notes the correlation of higher house prices with fashion trends is even better than for furniture. Specialty Fashion also offers margin growth opportunity and upside into FY15 is significant. The broker retains a Buy rating on that stock.

***

Utilities have been strong performers in the Australian market for some years. UBS forecasts Origin Energy ((ORG)) will offer the best total return in the sector, subject to completing APLNG on time and on budget and assuming improvement in electricity margins. The broker also likes Spark Infrastructure ((SKI)), with 10% upside along with a fully funded 6% yield. DUET ((DUE)) also offers a strong yield at 7% and is a potential candidate for consolidation. But It now trades in line with valuation and there are some asset debt concerns so UBS is more comfortable with a Neutral rating.

For the first time in the history of Australia's National Electricity Market no new capacity is required in any region for the next 10 years. JP Morgan notes that supply adequacy has reached the point where significant capacity can be removed and still meet reliability standards, based on the market operator's test report. The broker notes AGL Energy ((AGK)) and Origin Energy have made significant investment in generation assets in recent years. The acquisition of MacGen tips the scales against AGL in a declining wholesale price environment but JP Morgan expects that hedging arrangements will limit the near-term impact and a high level of operating leverage will benefit the company should the cycle turn. The broker retains an Overweight rating for Origin and Neutral rating for AGL.

The Australian market operator has released electricity churn statistics for July which showed headline churn increased 2.7% to 20.7%. Churn has oscillated around 19% since late last year, having trended down after the cessation of door knocking. It now appears to be stabilising. Victoria continues to be the most competitive market, with churn rising 4.5% to 29.8% in July. NSW remains lowest of the four states in the database, with churn of 15.6%.

***

Goldman Sachs has added Ozforex ((OFX)) to its Australian small & mid cap focus list. To date the list is performing 0.5% better than the ASX Small Ordinaries Accumulation Index. However, when viewed on a rolling 12 months basis the list is underperforming the index by around 1.5%. Best performers on the list to date are Fonterra Shareholders Fund ((FSF)), Austbrokers ((AUB)) and SG Fleet ((SGF)).

***

In the wagering industry, talk of consolidation has put the spotlight on the implications of a tie-up between Tabcorp ((TAH)) and Tatts ((TTS)). BA-Merrill Lynch has put various scenarios under the microscope and finds there is some strategic merit in the idea. Potential synergies suggest Tabcorp could pay at least 10-12 times earnings for Tatts' wagering business, and still create material accretive value. This could also be attractive from Tatts' perspective as well, suggesting to Merrills an equity valuation range of $3.61 to $3.85 a share. Recent changes to race field fees and minimum bet obligations appear to be putting pressure on corporate bookmakers. A combined wagering business could further strengthen the domestic incumbents given their strong market share and broad portfolios.

***

Turning to supermarkets, Merrills observes the two majors in Australia have substantially increased profitability. Coles has increased earnings by a compound rate of 16.5% since 2009, while Woolworths ((WOW)) supermarkets have increased by a compound 8.5%. With the cost of goods for food retailers being 70-75%, and with fixed cost to sales being around 10% of sales, Merrills consider it logical to conclude that suppliers have funded the majority of the growth in earnings for the retailers. Australian supermarket margins are high compared with global peers, perhaps by as much as 2.5 times if adjustments are made for the fact Australian retailers lease their properties whereas the majority of global retailers own theirs.

What may be changing? Claims the supermarkets have abused market power have grown over the past four years and Merrills notes the competition regulator, ACCC, has recently taken some action. This signals to Merrills that the opportunity to extract better buying terms from suppliers is ending and this is likely to have a material impact on the earnings growth of Wesfarmers ((WES)), the owner of Coles, and Woolworths in coming years.
 

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article 3 months old

Aristocrat Goes To Video

-Enhancement to cash flow
-But question over returns
-Clear strategic merits
-Timing delays in Macau, Japan
 

By Eva Brocklehurst

Aristocrat Leisure ((ALL)) is expanding its US frontier. The company is acquiring Video Gaming Technologies, a US-based manufacturer of Class II machines for Native American casinos, for US$1.28 billion. The deal will be funded by a mix of debt and a $435m equity raising. The equity raising includes a placement of up to $30m to the Ainsworth family, an institutional placement of $375m and a share purchase plan up to $30m.

The acquisition appeals to brokers on the basis of the free cash flow that VGT generates and the recurring nature of the revenue stream, which JP Morgan expects will help smooth the volatility in Aristocrat's earnings. The main adjustment to earnings will come from tax and interest rate benefits but the cash flow should allow Aristocrat to invest in other areas such as online. For JP Morgan, the key question emanating from this acquisition relates to the future changes to VGT's installed base. The company already has more than 90% of the mechanical reel market in the US State of Oklahoma, so growth will need to come from the video market or from other Class II states.

Most brokers believe the deal is highly accretive, providing a complementary product to Aristocrat's Class III machines and exposure to a new customer segment. BA-Merrill Lynch agrees, to some extent. The broker takes issue with the returns rather than the earnings, suspecting the company has just plugged a potential hole in a subdued market. The broker thinks the returns are unattractive versus the cost of capital, while the balance sheet will be stretched post the deal. The broker always thought second half FY14 earnings assumptions were stretched, even with the delays in Macau and Japan the company has now alluded to. The broker cannot help but suspect the underlying market remains challenged.

Deutsche Bank estimates a pre-tax return on capital of 8.7% with a debt/earnings ratio increasing to 2.7 times from 0.7 times. Execution will be therefore be critical, to ensure the transaction does not become value destructive. To this end it will require the maintenance of long-term commitments and relationships as well as the production of compelling content, in the broker's opinion. Several brokers wistfully note a lower Australian dollar would also be of great help to Aristocrat.

While there is a strategic rationale in the acquisition, brokers also acknowledge VGT is heavily exposed to Oklahoma. Merrills observes VGT seems to have reached a saturation point in that state and stalled from a growth perspective. It is unclear how relevant the product is to other jurisdictions. Deutsche Bank also suspects the new much smaller Class II market will challenge Aristocrat at the same time as it is gaining considerable traction in the Class III market. Macquarie observes the Class II segment is well supported by Native American casinos and that there is no requirement to share revenue with the state, as is the case for Aristocrat's Class III machines. On the downside, Aristocrat inherits exposure to lumpy product churn down the track, given the nature of Class II contracts.

VGT will operate as a stand alone division and there is minimal product and geographical overlap, so Citi envisages an opportunity for Aristocrat to develop Class II video games and cross-sell product into an expanded customer network, both in North American and internationally. The broker expects profit accretion of 20% but earnings per share accretion of just 4% in FY16, because of the capital dilution. The deal should provide for faster paying down of debt. Citi estimates net debt will peak at 3.2 times earnings in FY15 before declining to 2.1 times in FY16. More than 60% of Aristocrat's earnings will now be based in the US. Citi's Buy rating is based on market share gains through an expanded product portfolio.

UBS is also attracted to the acquisition's strategic merit and has upgraded its rating to Buy from Neutral. The broker thinks the acquisition provides the opportunity to grow North American recurring revenue and leverage from the Native American relationships. UBS does not expect any meaningful improvement in demand for replacement machines in 2014, as casino gaming revenues are subdued across the key US markets. The broker assumes modest improvement in FY15.

Brokers have reduced FY14/15 earnings forecasts, while incorporating the benefits of the acquisition from FY16. The reason for the reduction in near-term forecasts is a timing issue. Regulatory changes in Macau, which will require a large number of gaming machines to be replaced, are now assumed to provide benefits only from FY15, while the release of Black Lagoon 2 in Japan is now expected in FY15 not late FY14, as the company is yet to receive regulatory approval. Equity dilution from the placements is also expected in FY15.

CIMB thinks the opportunities that come with VGT are clear, via enhanced content library and video terminal expertise. The broker has also had a closer look at the regulatory situation in Macau. Aristocrat is the major player with about 60% market share and the broker understands, while the Viridian Widescreen boxes require only small changes to become compliant with regulations, both the company's Xcite MK6 and Standard Viridian boxes need to be replaced. CIMB thinks the market is not factoring the extent of the earnings upside that will come from this replacement cycle in FY15, perhaps as much as 20%.

Aristocrat attracts five Buy ratings, one Hold and two Sell on the FNArena database. The consensus target is $5.79, which suggests 9.3% upside to the last share price. This target compares with $5.71 ahead of the announcement.
 

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article 3 months old

Tatts Wins Big In Queensland And Victoria

-Earnings upside from Qld deal
-Commitment to marketing, network
-Victorian court win delivers compensation
 

By Eva Brocklehurst

Tatts ((TTS)) has won big. In two consecutive days the company has had a victory in the Supreme Court of Victoria and also framed a deal with the Queensland government whereby its ascendancy in racing and wagering is affirmed.

Brokers were very positive about the news and two - Macquarie and UBS - upgraded recommendations as a result. The announcement of the deal removes an uncertainty cloud over the expiring licence in Queensland, while the victory in the Victorian Supreme Court means the compensation payment is ultimately worth 26c per share, on Macquarie's estimates.

Macquarie had expected a less favourable result from the negotiations in Queensland. Under the new agreement the improved terms on taxes paid to the state should increase TattsBet earnings by around $12.3m, despite being partially offset by the introduction of new fixed fees and marketing costs. To secure the deal and extend wagering licences, Tatts has committed to spend $150m over nine years. Macquarie thinks the earnings upside outweighs the fee paid for extending wagering licences. There could be peripheral benefits as well. Macquarie notes the formalisation of a joint venture structure between TattsBet and the industry makes concessions for new products such as Trackside more likely in the future. The broker upgrades to Outperform.

The issue over the Queensland licences was a drag on the share price and UBS thinks together the two wins deserve an upgrade to Buy. Tatts is envisaged as better off under the new Queensland framework and the outcome was better than UBS feared. Tatts will extend retail exclusivity for 30 years as well as the sports betting licence for 61 years. A new $15m annual fixed product fee and 2.5% of fixed odds retail sports bets, capped at $5m, are payable.

Tatts will only be liable for race field fees if there is a net cost to Queensland, and even then it is shared 60% Tatts/40% racing industry. Tatts will pay $150m as a licence fee in four instalments and the tax on tote betting is reduced to 14% from 20% and for fixed odds to 10% from 20%. UBS thinks the stock is a high quality, defensive business with strong underlying cash flow and long-term monopolistic licences with stable earnings and low capex requirements. The stock's premium is justified, in the broker's view, despite a relatively low growth profile.

Citi views the Queensland deal as highly favourable because of the associated cost saving and the extension to retail exclusivity. Lower tax rates more than offset an additional $15-20m in contributions to Racing Queensland. Citi calculates the deal creates a net $114m or 8c per share in value for shareholders. Tatts has also made commitments to invest in marketing and network initiatives to improve the competitiveness of its operations. Tatts is expecting a cash payment on June 30 of $540m from the Victorian government following the court ruling in its favour. From that Citi estimates gross value creation to be 28c per share, after accounting for a likely appeals process which will delay a final outcome. Still, the broker retains a Neutral rating as the stock is trading near estimates of fair value.

JP Morgan expects a significant re-branding exercise in wagering in the next few months. The broker considers the outcome in Queensland was "excellent" given the risks surrounding potential competition, and the erosion of earnings that would have occurred if the race field offset was reversed. The broker has incorporated the new fee arrangements and increased marketing spending estimates by $10m per annum and considers there is potential for further upgrades amid signs the cost initiatives are working. Until then the broker retains a Neutral rating.

BA-Merrill Lynch was quite stunned, not expecting to upgrade forecasts, being more upbeat than the rest of the market ahead of the announcements. The broker had believed the market was too negative on the stock but the deal was even better than it expected. The broker thinks management deserves credit for achieving the long-term licences and an attractive tax structure, as well as maintaining the race fields offset function. Critically, the legal action between Racing Queensland and Tatts over unpaid offset fees has been terminated. This had represented a potential liability of over $100m. The broker has raised profit forecasts for FY15 by 1% as a result of the negotiations. The company's lotteries also remain the core supporting pillar of Merrills' Buy case.

On the FNArena database Tatts has three Buy ratings, three Hold and one Sell (CIMB ahead of the announcements). The consensus target is $3.32, suggesting 1.5% upside to the last share price and comparing with $3.11 ahead of the two announcements. The dividend yield on FY14 and FY15 consensus forecasts is 4.6% and 5.0% respectively.
 

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article 3 months old

Weekly Broker Wrap: Stock Markets, Wagering, Online, Consumers And Financials

-Oz corporates growing again
-Chinese markets most risk sensitive
-Risks of race field fees overplayed
-Online sector valuations stretched
-Budget turns Oz consumers negative
-Cautious optimism on diversified financials
 

By Eva Brocklehurst

Alphinity Investment Management believes the time has come for the Australian share market to stand on its own account, as tapering by the US Federal Reserve creates a mixed outlook for US equities. Corporate earnings in Australia are growing again and should support positive returns from Australian equity markets. Alphinity envisages growth opportunities in the housing, consumer and energy sectors for the remainder of 2014. The banking sector should still provide decent returns but these are likely to stabilise, while the housing sector gathers momentum. Conditions for retail and consumer goods are set to improve, while resources are expected to remain soft. Alphinity believes the soft patch in the US economy was largely caused by a severe winter and continued improvement on this front will help those companies with international operations in the US and Europe.

On the other side of the Pacific, Australia's largest export market, China, is winding back growth forecasts, and there are implications for resources and other export sectors. The sourcing of goods from Asia has been an important theme for most retailers in recent years but Alphinity believes vetting of supply chains will become increasingly important, given worker conditions are increasingly being scrutinised. Alphinity observes China's shift to consumer-led growth from infrastructure and property investment is well in train. China's desire to clean up its environment and business practices and address unsustainable losses in steel is being dealt with at the same time that resource companies are ramping up supply of raw materials. Alphinity is, therefore, cautious on resources stocks.

Macquarie has surveyed investors and finds them optimistic, with 82% of global investors expecting 2014 will be another positive year for equity markets. Investors still favour equities over bonds and expect cyclical stocks to outperform defensives. Conviction levels have fallen away following a sharp rotation in recent months and Macquarie notes earnings momentum and value are increasingly in favour. Price momentum is expected to show the worst return through to the end of the year. Geo-political risk has been heightened and China is the most commonly identified location where markets could be derailed. Most upside risk is envisaged coming from the US and Europe over the next six months.

***

Race field fees across Australia's horse racing industry look set to rise, following Racing Victoria's lead, but Morgan Stanley thinks the longer-term risks to the wagering industry growth, margins and valuation look overplayed, given the recent declines in share prices. Wagering operators can moderate increased fees by increasing pricing to punters. Moreover, the broker's feedback from the industry reduces concerns about the risk of continual fee increases as, if fees increase greatly, it would result in lower growth, which would hurt all involved. The broker remains Overweight on Tabcorp ((TAH)) on the prospects for margin expansion and increased dividends.

***

UBS believes now is a good time to review the Australasian online sector. UBS, taking a sample of 30 internet stocks globally, notes the sector has fallen 4% over the last month. In comparison, local stocks are performing better. SEEK ((SEK)) has been the best performer while Trade Me ((TME)) has underperformed its Australasian peers. Still, UBS suggests valuations are now stretched. Valuing the domestic classified franchises based on the addressable market and long-term share implies the other assets of these companies are overvalued by up to 40%. UBS suggests Carsales.com ((CRZ)), Trade Me and SEEK are the most overvalued, while REA Group ((REA)) appears to be fair value. UBS retains a Neutral rating on SEEK based on fundamentals but believes the positives are more than priced in. In contrast, Carsales.com's international assets are now considered richly priced and Trade Me is expensive with limited earnings growth, so both these stocks warrant a Sell rating.

***

Bell Potter estimates the federal budget initiatives together amount to a net increase to the burden on consumers of $32 billion over four years, with a skew from FY16. These initiatives include welfare cuts, healthcare changes, the re-introduction of petrol excise and the debt levy. Bell Potter expects consumer sentiment will remain negative over the short term as consumers adjust, and this will be reflected in weaker discretionary trading. Nevertheless, a recovery is expected in the final quarter of 2014 because business confidence should remain positive and drive an improvement in employment prospects, while the wealth effect should remain intact through buoyant house prices and equity markets. Through this volatile period the broker's favoured stocks are large caps such as JB Hi-Fi ((JBH)) and Premier Investments ((PMV)), mid caps such as Kathmandu ((KMD)) and small caps such as Retail Cube ((RCG)). Kathmandu and Retail Cube have vertical models which strengthen the scope to manage margins while JB Hi-Fi's dynamic store model strengthens its capacity to adapt to market conditions.

***

Bell Potter has become more selective and pulled back from a strong Overweight position in the diversified financials sector. This is reflected in downgrading Computershare ((CPU)) to Hold and ASX ((ASX)) to Sell. The broker maintains macro drivers are supportive of the sector, but largely for wealth managers rather than the diversifieds. The possibility of a near-term correction is flagged but Bell Potter does not think this is an ongoing risk. The medium-term outlook remains positive and the broker expects the ASX200 to finish 2014 above 5,700. The sector is likely to be characterised over the next 1-2 years by a flow to riskier investments and a slow decline in safe haven investments.
 

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article 3 months old

Weekly Broker Wrap: Inflation, Accommodation, Gambling And NZ Building

-Low inflation is problematic
-Wotif.com battles competition
-More upside for Tabcorp?
-Echo Entertainment vulnerable
-Fletcher favoured in NZ residential
 

By Eva Brocklehurst

Low inflation. Is it good? Macquarie tackles the subject, noting that a structural legacy of the global financial crisis has been the onset of low inflation in many of the major developed economies. Low inflation becomes a problem when it turns into a deflationary spiral. The broker's analysis finds those countries which have specific numerical inflation targets prevent declines in short term inflation expectations from becoming entrenched. Ultra low inflation is considered a current problem in the eur zone and for financially stressed countries, as it implies higher real debt levels and higher real interest rates, less relative price adjustment and higher unemployment.

In Australia's case, the inflation targeting regime of the Reserve Bank means inflation expectations longer-term consistently stay within 0.1-0.2 percentage points of the mid point of the central bank's target 2-3% band. The recent strong and sustained appreciation of the Australian dollar has also played a key role in anchoring longer-term inflation expectations. Macquarie believes global investors should be alert to the risks of low inflation and should assess country/regional risks according to measures adopted by central banks to ensure inflation expectations remain well anchored.

***

Feedback from the accommodation industry conference suggests to JP Morgan that Australia's tourism environment is stagnant and the cycle is not supporting listed travel agents. This means the competition remains intense and there is pressure to increase spending on marketing, which in turn pressures margins. The broker observes the majority of global online travel agents are pursuing traditional advertising such as TV to complement their search engine marketing. This is seen as a better way to build brand awareness.

Global tourism operators are spending more on marketing and JP Morgan thinks this may continue to erode Wotif.com's ((WTF)) market share, despite the company's market-leading brand. The broker notes Wotif has mounted initiatives to regain share but thinks there's a clear need to preserve the relationship with hotel and accommodation providers to protect advantages, such as last room availability. Another observation was that room supply growth was flat in FY13 and room supply in FY14 is forecast to grow 2.7%. Despite little in the way of increased supply the average room rate has risen by just 1.5%. The broker notes the four main capitals - Brisbane, Sydney, Melbourne and Perth - are outperforming the national average on revenue per available room, while the leisure centres of Cairns and the Gold Coast are underperforming.

***

Australia's gambling sector can be classed as "mature". That view, combined with a more reserved consumer and modest top line growth, suggests to Morgan Stanley that investment opportunities remain very stock specific. The broker breaks from consensus on Tabcorp ((TAH)), expecting there's upside to earnings and distributions. Expanding margins are expected to offset lower turnover and provide for growth in wagering. A structural change delivers the most benefit, as customers increasingly bet online and on fixed odds. Turnover may decline, as UK bookmakers take share, but the broker still thinks Tabcorp can generate 14% 3-year compound earnings growth rates and raise the pay-out ratio to 100% from 80%.

Another area where the broker diverges from consensus is on casino operators Crown Resorts ((CWN)) versus Echo Entertainment ((EGP)). The broker believes Echo is more exposed to the swings in VIP table business, despite Crown having the larger VIP market share in Australia. This is because Crown's VIP business dominance is only on an absolute basis. VIP makes a larger relative contribution to Echo's earnings. Given the greater VIP earnings volatility experienced by Echo's domestic casinos, the stock deserves to trade at a valuation discount to Crown in Morgan Stanley's view. This is potentially offset if Echo can take some share of this market away from Crown. Crown will face earnings upside if it gains a foothold in the Queensland casino market, with up to three additional licences being issued. As a result, Echo faces significant risk as its Queensland dominance is set to be diluted. This will be compounded in 2019 when Echo loses NSW dominance with the opening of Crown's Barangaroo.

Morgan Stanley does not think the market has fully considered the possible impact of privatisation of Western Australia's TAB and/or lotteries. These are some of the last government-owned gambling businesses in Australia. There are opportunities and risks for both Tabcorp and Tatts ((TTS)). Morgan Stanley thinks opportunities for Tatts in the core lotteries division is limited. Tatts has lotteries exclusivity in NSW and Queensland until at least 2050. The Victorian licence is up for renewal in 2018. The broker does not think a potential WA transaction would be positive for Tatts, as there's limited scope for cost reduction. In wagering, Tabcorp has successfully renewed its licence in both NSW and Victoria and secured retail exclusivity. There could be upside to earnings if it is able to acquire WA TAB because of the cost reduction potential, in the broker's view.

***

CIMB has extended the home building survey to New Zealand, noting the rebuilding of Christchurch continues to gain momentum and is coinciding with a cyclical recovery in other major cities. The analysts have revised NZ residential construction forecasts and now expect 16% growth in 2014. In contrast to the nascent recovery in Australia, NZ's residential recovery is continuing at a rapid rate. CIMB believes there's further upside to come. Builder commentary suggests, while Christchurch and Auckland have been the drivers of the improvement so far, this is now filtering through to other cities and regions. All this leads CIMB to prefer Fletcher Building ((FBU)) in the building materials sector with the three C's - Cyclical leverage, Christchurch rebuild and Cost reductions - seen providing many years of earnings growth.
 

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article 3 months old

Echo Worth A Punt

By Michael Gable 

Markets continue to fail to trade much higher. We are still looking at support levels around 5230 and then possibly 5080 for the ASX 200 before we would change our cautious stance. With David Jones receiving a takeover offer (we tipped it in February to hit $4), our JB Hi-Fi ((JBH)) recommendation from last week appears to be doing well as it basks in DJ’s takeover glory. That is one stock worth looking at on any dip. In this week’s report, we uncover an opportunity in Echo Entertainment Group ((EGP)).
 

Echo Entertainment


Echo had taken a tumble in the last two years but we can see that since about November last year, it has been base building. During that time we have seen the Relative Strength Index (RSI) climb from an oversold condition. While the price was building a base, the momentum as measured by the RSI, was heading higher. It has culminated in a breakout in the EGP share price last week. This current level around $2.80 appears to be a bit of an obstacle, so if EGP can clear that, then the next levels of resistance are around $3.00 and then major resistance at $3.40.
 

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

Disclaimer

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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article 3 months old

Treasure Chest: Rumours Of Tabcorp’s Demise Unfounded

By Greg Peel

The argument is a straightforward one. For decades Tabcorp ((TAH)) has dominated the betting market in its licenced regions with its once government-owned totalisator (“tote”) system of pooled bets placed at “the TAB” (totalisator agency betting). Even those whose gambling habit extends only to a fiver each way once a year on The Cup would appreciate that while the win/place odds are published at the time of betting, those odds will change by the time the final “dividend” for the win/place is declared.

For Tabcorp, the TAB is a no-risk, commission-based earnings generator. Tabcorp simply pays out winnings based on the weight of bets in the pool and takes its standard cut. The only “risk” is that the high cost of running the business is not sufficiently recouped through turnover, that is the size of the betting pools. And that’s where the competition comes in.

If on Cup Day you actually go to Flemington and place a bet with a bookie in the ring, you will be paid the odds the bookie gives you at the time you place the bet irrespective of what his or her odds might have changed to by the time the horses jump. This is “fixed odds” betting. If everyone went to the track and placed bets only with bookies and not the TAB, then Tabcorp would not make any money.

If we now expand the universe to include on-line and smart phone services, and to include betting on all sports anywhere in the world along with election results, Princes’ names, two flies up a wall etc, we introduce the flood of online betting services to arrive in this country over the past several years, as well as those established domestically. These are “fixed odd” services, just like bookies at the track, and offer all manner of incentives to rope in the mugs. Every bet placed with an online betting service is money not reaching Tabcorp, or its domestic rival Tatts ((TTS)).

The sheer number of such services identifying Australia as rivers of gold and the extent of the betting options they offer even within the one game/race/etc has made fixed odd betting a new growth industry in this country. The days of the bunch of sad old guys sitting in the corner of the pub with their form guides, eyes glued to the TAB odds, are numbered. On that basis, it is very difficult to see how the anachronistic concept of totalisator betting can do anything but wither and die. Tabcorp and Tatts can themselves offer fixed odd betting in competition, but fixed odd bookmaking is a risk business, not a commission business, and the space is already very crowded.

So goes the argument. Totalisator betting is destined to go the way of print media, land lines and cheap lamb. And hence so will go the once reliable earnings streams of Tabcorp and Tatts.

But CLSA disagrees.

“We believe the Tabcorp wagering customer base is stickier than anticipated,” say the CLSA analysts, “with only moderate market shares declines [apparent] in the past five years despite aggressive competitor advertising.”

CLSA further notes that any market share decline does not necessarily equate to an equivalent fall in earnings given “an expanding pie”, meaning a combination of the number of gamblers and the number of gambling options, and margin expansion. The analysts have also discovered that Tabcorp’s revenue decline in the December quarter was more results-driven than structural, and indeed revenues have recovered in the March quarter.

And there is more to Tabcorp’s gambling footprint than just the tote. CLSA believes earnings will grow for Tabcorp ahead of expectations not only because forecast declines in wagering are exaggerated but through growth provided by new initiatives in Keno and Tabcorp Gaming Services (TGS – pokies et al).

A further factor is licence amortisation. Traditionally Tabcorp has paid a hefty price for its exclusive regional licences and the amortisation of that cost has impacted on earnings each year. The impact on earnings is then translated into the dividend payout ratio. A year ago CLSA suggested Tabcorp earnings forecast should be “normalised” on the analysts’ view the company will pay nothing to renew its licences on expiry.

This view is beginning to gain traction in the market, but CLSA believes it will not reach wide acceptance until Tabcorp lifts its dividend payout ratio to 100% of profit. Given comfortable gearing, CLSA believes this can be achieved in FY15 to provide a dividend yield in excess of 6%.

CLSA is forecasting a compound annual earnings per share growth rate for Tabcorp of 9.2% over the next three years, implying a forecast dividend yield in FY16 of 7.1% (28% ahead of the consensus forecast). At a 12.6x PE, CLSA believes Tabcorp is currently inexpensive relative to both yield and growth. And there is a free option implied on $1bn of licence compensation.

CLSA has a Buy rating on Tabcorp with a 12-month price target of $4.24. The FNArena database shows four Buy or equivalent ratings, two Hold and two Sell for a consensus target of $3.49.
 

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article 3 months old

Weekly Broker Wrap: Telcos, REITs, Registries, Wagering And Media

-Growth slowing for telcos
-Valuation key to GPT, Charter Hall
-Shareholder numbers decreasing
-William Hill threat to retail wagering
-Media outlook improving


By Eva Brocklehurst

CIMB contends there's no such thing as normal in the telco sector. Conditions change with the seasons. Still, the broker notes several abnormal issues influenced performance over the recent reporting period and these seem to be diminishing. The broker thinks the mobile sector is promising more competition, while organic growth in broadband is slowing and there are fewer acquisitions available to improve scale. Telstra ((TLS)) is well priced and offers reliable earnings and dividend with sheer scale enabling it to withstand market conditions. Smaller telcos are priced for growth or acquisitions, opportunities that CIMB thinks are receding. Growth will still happen, the broker maintains, but it will be a return to low service revenue growth in mobile and a maturing, hence slowing, of fixed broadband growth. The broker is generally neutral on the sector. Among the Aussie telcos the broker covers, CIMB has a Hold rating on Telstra and a Reduce rating for both M2 Telecommunications ((MTU)) and iiNet ((IIN)).

Are GPT Group ((GPT)) and Charter Hall Group ((CHC)) starting to resemble each other? That's the question CLSA is asking. Both have high growing property funds in the same three asset classes with near-identical margins. The broker notes Charter Hall has greater leverage to funds management growth while GPT's balance sheet capacity is a huge comparative advantage. So, which one gets the bigger tick? The starkest difference, CLSA observes, is in valuation.

The broker estimates the market places a 20 times earnings valuation on Charter Hall and no premium for GPT. In valuing Charter Hall, CLSA notes the company has outperformed Australian real estate investment trusts (A-REITs) by 13.4% versus 5.5% year-to-date, and is trading within 1% of the price target - $4.17. This means the stock is fair value, with the price target implying a 6% total return. Hence, the rating is downgraded to Underperform. In GPT's case, the stock has outperformed A-REITs by 10.3% year-to-date and the price target of $4.15 implies a 16.2% total return. The Outperform rating is maintained.

The JP Morgan registry survey, conducted in December and January, has found Computershare ((CPU)) and Link service 95% of the companies in the S&P/ASX200 index, although Boardroom doubled share to 4%. Of note, the rate of switching increased in 2013, with 4.6% of the market changing providers, up from 1-2% historically. There was also an increased tendency for respondents to put registry contracts out to tender.

Shareholder numbers continue to decrease, with 72% of companies reporting flat or decreasing shareholder numbers over past six months. Pricing was flat or falling, driven by, JP Morgan suspects, falling shareholder numbers, increased competition and a low number of contracts being renewed in any one year. Computershare received a higher positive response rate for performance compared with Link, but Link continues to outperform on cost. Another observation is that corporate activity was weaker for registrars in 2013 against 2012, while a stronger IPO market did not add material new shareholders. Secondary raisings decreased by 19% and the companies with a discounted dividend reinvestment plan fell to 17% from 26%.

Be warned. CIMB observes UK-based wagering business William Hill is talking up intentions for Australia. The company will land a vastly improved offering at the end of this month and intensify competition with the locals, Tabcorp Holdings ((TAH)) and Tatts ((TTS)). By the end of March William Hill will integrate Tom Waterhouse into Sportingbet and launch a new website, providing easier player registration and betting, with improved display and navigation. CIMB thinks this will have a significant impact on Australian online wagering. More so because it appears from the results season that online betting is cannibalising retail betting. William Hill is shifting its marketing mix towards online and the company expects to reach a 69:31 ratio in FY14. This leads to a lower cost per player acquired and will enable the business to continue to operate on considerably lower win margins than either of the local retail incumbents. It adds up to a loss of market share for both Tabcorp and Tatts, according to CIMB.

The latest results season was positive for the media. Finally, there are signs of improved trading and cost control. JP Morgan observes a bump up in share prices in response to the better outlook. It's early days but the broker is heartened by the improved second half outlook, with Fairfax Media ((FXJ)) being the stand out stock in that regard. Seven West Media ((SWM)) has increased TV guidance to low-to-mid single digit growth. The one area that remains subdued is regional markets, reflected in a more sober outlook for local revenue from Prime Media ((PRT)) and Southern Cross Media ((SXL)).

JP Morgan has Overweight recommendations on Carsales.com ((CRZ)), Seven West and Prime Media. Understood. The broker thinks the issues facing Carsales in new car inventory/manufacturer display are short/medium term. However, the broker is Underweight Ten Network ((TEN)) and Fairfax. The Underweight rating for Ten stems from the fact that JP Morgan thinks any rating/revenue recovery will take time and require significant reinvestment in programming. As for Fairfax, cost control and improved trading conditions are well and good but the broker is cautious about extrapolating this out too far. JP Morgan continues to believe that, excluding Domain, Fairfax lacks strong digital growth assets.
 

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article 3 months old

Winners And Losers In Australian Gaming

-Can Oz casinos recapture share?
-Key to VIPs is in revamped properties
-Wagering competition intensifying
-Tabcorp better placed than Tatts

 

By Eva Brocklehurst

Australia's gaming market has been soft of late but Deutsche Bank observes expenditure is now starting to improve across gaming machines, casinos, wagering and lotteries. The better gaming environment is attributed to improving consumer confidence and retail sales, with the evidence being seen in the company trading updates and gaming machine expenditure on the east coast, in particular. One area of recent weakness is the VIP sector, where both Crown Resorts ((CWN)) and Echo Entertainment ((EGP)) have lost market share to Macau and other international casinos. Chinese New Year for the casino operators was strong, with Deutsche Bank noting gross gaming revenue in Macau strengthened in February after a weak January.

Deutsche Bank observes Crown is using the decline in Australian turnover to argue for more competitive tax and regulatory regime. Echo's activity levels also declined in both Sydney and Queensland. Echo's management remarked at the results briefing that the underlying VIP rebate market potential in Queensland is unlikely to be fully realised until the necessary capital investment is made. Upgrades to property are the key to a turnaround in domestic fortunes, in Macquarie's view. Casino operators in Australia have significant capex intentions which, despite the current soft environment in Australia, Macquarie believes will provide opportunity for operators to increase their share of the VIP market and premium mass segments from Asia.

Macquarie notes many players are being priced out of visiting Macau and this factor, along with a limited supply of integrated resorts, means Australian operators Echo Entertainment and Crown are well placed. Macquarie highlights surveys which show Asian travellers continue to view Australia as a preferred destination. Visitor arrivals from China rose by 14% in 2013. Sydney and the Gold Coast rank as the top destinations, boding well for Echo as it already has resorts in both cities. The key to monetising this demand will be effective marketing of the company's properties throughout Asia, in Macquarie's view. The broker has upgraded medium term earnings forecasts for Echo by 3-4% and retains an Outperform rating on both casino operators.

The proof of the pudding will be in the eating, so to speak. JP Morgan has expressed growing concern about the Australian casinos' ability to maintain share of the Asian VIP market and will be on the look out to see if the increased competition from Asia maintains that slowing trend. For now, this broker retains an Overweight rating on Crown but an Underweight rating on Echo. Echo just has too much uncertainty for JP Morgan. The Brisbane exclusivity issue and questions over the returns from the property expansion plans cloud the stock. Deutsche Bank retains Buy ratings for Aristocrat Leisure ((ALL)), Crown and Echo. The former is considered well positioned in the gaming machine market, with a sound balance sheet. Crown is benefitting from strong business in Macau, offsetting any Australian weakness, while Echo appears to have seen a nadir in its earnings and domestic gaming revenue is improving.

The Australian wagering market is a different kettle of fish. The game is being played hard and competition is intensifying. English player William Hill has announced an upgraded offering will be launched in Australia before the end of the month which, in CIMB's view, will put the heat on Tabcorp Holdings ((TAH)) and Tatts ((TTS)). CIMB observes William Hill has reported solid numbers for its Australian businesses in the FY13 results. These businesses are Sportingbet, Centrebet and Tom Waterhouse. The company stated that all three brands will be maintained but Sportingbet will be the priority. Tom Waterhouse has to be maintained until 2015 as per the earn-out agreement. It will be integrated into Sportingbet and a new Sportingbet website will be launched. The improvements that are key to the site's success, in CIMB's view, are easier player registration and placing of bets, with better display and navigation.

This spells out why the broker has a cautious stance on Tabcorp and Tatts. CIMB thinks William Hill will have a significant impact and the theme emanating from the local operators' results season is that online wagering is cannibalising the retail business. This signals to CIMB that William Hill can continue to operate on considerably lower margins than Tabcorp or Tatts and, along with more product and an improved platform, suggests the latter two are losing market share. CIMB's ratings stance: Reduce.

While accepting there is litigation hanging over Tatts and Tabcorp in Victoria, as well as the racefield product fees deductibility issue in Queensland for Tatts, Deutsche Bank is not so negative. The broker thinks Tabcorp is executing well in the competitive environment and upside could come with the potential licence fee refund in Victoria. This stock carries a Buy rating for the broker. Deutsche Bank has a Hold on Tatts as, while the performance is robust, the broker is concerned about the lagging wagering business and the Queensland racefield product fees. Macquarie's ratings reveal a similar pattern, with an Outperform rating for Tabcorp and Neutral for Tatts. Tatts is suffering from the uncertainty over the Queensland wagering exclusivity which diminishes its strong performance in lotteries. Macquarie's more positive on Tabcorp for similar reasons to Deutsche Bank and also thinks there's scope for a review of that stock's dividend policy over the next 12 months.
 

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