Strong Outlook For Oz Gaming Stocks

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-Australia taking VIP revenue share
-Benefit from China's corruption crack down
-Mass market growth highest in 5 years
 

By Eva Brocklehurst

VIP turnover exceeded expectations for all casino operators and was the main beat in terms of earnings estimates for the gambling sector in the latest reporting season.This resulted in Goldman Sachs upgrading its outlook for Crown Resorts ((CWN)), Echo Entertainment ((EGP)) and Skycity Entertainment ((SKC)). The broker envisages material upside potential in VIP returns, as Australia gains share in the Asian region.

Crown continues to dominate the Australian VIP market but the broker suspects Echo Entertainment has grown its share since the renovation of The Star, and now accounts for around 40% of Australian VIP. With increased focus on regulations in Macau, and potential for 100% smoking bans to commence from 2016, Goldman believes Australia is well positioned to take further share of the Asian VIP revenue pool.

Deutsche Bank is also positive on the sector, which is seen underpinned by sound balance sheets, good cash flow and reasonable dividend yields. The VIP segment is expected to benefit from the corruption crack down in China as well as recent investments and higher commission rates. Lower revenue from Macau may impact somewhat on Crown. The Australian VIP market was up strongly in the first half and the broker suspects both Crown and Echo Entertainment have increased share following the Chinese crack down. Crown is expected to explore both capital and bank markets to finance anticipated growth projects, including a potential issuance of an ASX-listed hybrid.

In terms of the mass market, main gaming floor revenues were driven by lower petrol prices, rejuvenated loyalty offerings and regulatory change in Queensland. These factors resulted in the highest growth rates in five years, Goldman maintains. The second half of FY15 appears to have started well too, with Victoria posting strong growth and momentum continuing in Queensland. The industry is also benefitting from the investments made in prior years.

While yield is attractive in a low interest rate environment, the broker believes both Tatts ((TTS)) and Tabcorp ((TAH)) are trading at the top of the "defensives" on a FY15 price/earnings ratio basis, which means they may be factoring in the potential for more special dividends in the next six months.

Deutsche Bank expects benefits to continue to accrue from lower petrol prices and rates, underpinned by rising net wealth on the back of property and equity market gains. Domestic gambling expenditure is strong but Deutsche Bank observes the rate of improvement is mixed in both segment and geography. Casinos and gaming machines in Queensland and NSW remain the highest growth segments. Wagering is also strong in NSW and Victoria, while lotteries and Keno continue to lag. 

The ability to outperform in Australia's mature gaming industry will come down to having the right exposure to structural change, in Morgan Stanley's view. The broker believes Tabcorp, Skycity and Crown offer the most attractive risk/return metrics. The broker expects revenue to grow in line with household disposable income, while no regulatory or legislative changes are expected in the medium term.

Online/mobile betting is expected to continue to grow strong and shift the industry to fixed odds and away from pari-mutuel betting. Tabcorp is considered to be the main beneficiary of online growth ahead of Tatts because of its advanced offering. Echo Entertainment's loyalty program and Skycity's Auckland and Adelaide expansions are set to drive improved market share, in Morgan Stanley's opinion. The broker concurs that in VIP, all three casino operators are currently benefitting from the crackdown in China, taking market share away from Macau. Meanwhile, Crown is seen having the strongest exposure to the long-term growth in the Chinese mass market. 

Morgan Stanley does not believe, despite its larger VIP market share, that Crown will be more affected by swings in these numbers than Echo Entertainment. Rather, Echo has improved its share of the Australian market and, therefore, has been the key beneficiary of that geography's outperformance relative to Macau. This impact is magnified as VIP made a larger relative contribution to Echo Entertainment's earnings in 2014. The broker also expects, longer term, that Skycity will generate the best project return profile because of its Auckland and Adelaide redevelopments, which are focused on monopolistic, mass market opportunities.
 

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