Crown, The King Of Oz Gamers

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            [0] => ((ALL))
            [1] => ((TTS))
            [2] => ((CWN))
            [3] => ((TAH))
        )

    [1] => Array
        (
            [0] => ALL
            [1] => TTS
            [2] => CWN
            [3] => TAH
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This story features ARISTOCRAT LEISURE LIMITED, and other companies.
For more info SHARE ANALYSIS: ALL
The company is included in ASX20, ASX50, ASX100, ASX200, ASX300 and ALL-ORDS

By Andrew Nelson

A mostly lacklustre run of full year results did little to dampen Australia’s “four-horsemen” of the gaming and wagering sector, with Aristocrat Leisure ((ALL)), Tatts Group ((TTS)) and Crown ((CWN)) all higher over the last month, while Tabcorp Holdings ((TAH)) has held fairly firm. However, Citi suggests that the recent fortune has more to do with early guidance than it does results and outlooks.

The international outlook is volatile at best, and this is best highlighted by a 14% revenue downturn on the Las Vegas strip in July and while August revenue in Macau jumped 44% in August and is up 37% year on year, Citi thinks that this is a plateau that the market will quickly descend from. With the number of Chinese mainland customers withering due to new visa restrictions, the broker thinks September revenues could be hit by 20% or more.

However, the domestic market looks far more stable, with growth across all of the gambling markets that Citi track from the beginning of FY09. The broker thinks the recent shift to an easing stance by the RBA has begun to pick in and should help support the sector through the year.

So who’s doing what?

Shares in Aristocrat have rallied more than 40% on the collapse in the AUD, but Citi thinks this may be a bit overdone. Merrill Lynch concurs, saying that while it believes the long term outlook for gaming growth is solid, the short term difficulties the company is facing make the recent rally look overblown.

The broker is predicting difficult operating conditions for slot manufacturers in both the US and Australia for the remainder of 2008 and for at least the next six to twelve months. While the it notes the success of the the company’s Iridian product line and the expansion of the Elektroncek systems into new markets are not yet evident, it is upon these outcomes that the company is basing its 2008 results.

Citi agrees, saying the full year targets are a stretch and with deteriorating conditions in the US, how much can an appreciating US dollar really help? Especially given the current price is solely being driven by the currency outlook, which may not be sustained. Nonetheless, it notes the market still appears to believe the company will deliver on its current forecasts, despite a track record of disappointing in the past and the risk of a new CEO at the helm.

While keeping it on a Hold for now, Citi sees Aristocrat as the most vulnerable stock of the “four horsemen” in 2H08. Merrills is even harsher in its outlook, keeping an Underperform on its aforementioned concerns. The total count on the FNArena database is currently 3 Buys, 3 Hold and 3 Sells, making it an even 0.0 on the FNArena sentiment indicator. It is important to note only one of the Buys is recent, with Credit Suisse confirming last week the new pricing structure for pubs and clubs is a positive.

Citi suggests that Tabcorp and Tatts are much of a muchness at this point, with neither having much in terms of growth prospects and just not appealing at current levels. Both booked significant write-downs after losing their Victorian licenses post the April 2008 decision, but this was flagged well in advance and has been mostly factored in by now. Shares in both have been tracking mostly sideways for the past couple of months.

Of the two, the broker sees Tatts as having some limited upside in the near term, with a fairly comfortable debt level able to sustain payout levels for the time being ,and perhaps allowing the possibility of a modest buyback sometime in the future. If there were a refund from Victorian government on non-renewal of the gaming licence, the chance of a buyback is significantly improved.

Broader sentiment for the stock is a little better than Citi’s view might indicate, with the FNArena sentiment indicator sitting at 0.3 on 5 Buys, 2 Holds and 2 Sells. No surprise that one of the Sells is from Citi, who downgraded from Hold post the FY08 result. Credit Suisse is the latest broker to post a comment, maintaining its Buy and saying it liked the reception the group’s new pricing structure for pubs and clubs was getting.

With nothing on the cards but setting up a book in the Northern Territory, Citi sees little in terms of growth prospects ahead for Tabcorp. Other than that, the broker is expecting the company to begin cutting its future payout ratios to keep control of debt in the face of lower expected earnings. This move puts its BBB+ rating at risk, the broker points out, although the possibility of a $697 million refund from the Victorian government over the loss of it gaming and wagering license could well ease these pressures. But that’s a big maybe.

All in all, the FNArena sentiment indicator is sitting at 0.1, with 3 Buys, 4 Holds and 2 Sells. Deutsche Bank are the most upbeat at present and two weeks back noted that industry figures show gaming revenues in Victoria have been stronger in the first two months of the new financial year than was the case in the June half-year. All other recent commentary is post the August 7th result release.

That brings us to Crown and while it has been beset with delays, it is doing pretty well in general and has run pretty strongly of late, up more than 15% post report. But again, this has been helped by and appreciating USD. It is both Citi’s and the broader broker community’s favoured play even though it’s still a bit undercooked, with full value not expected until the City of Dreams is operational and regulation in Macau stabilises.

The company is forecasting mid-single-digit FY09 earnings growth from its domestic casinos, which JP Morgan thinks will mainly driven by Burswood. Pennsylvania revenues are also strong, given limited competition. However, the broker thinks most short-term gains will be offset by a significant loss from MPEL (due to the pre-opening costs).

The time frame for the Cannery settlement has been brought forward, and is now expected to settle by the end of this calendar year, but a relatively soft initial contribution is expected. JP Morgan predicts that a more meaningful contribution will begin to build in April 2009 when the Meadows permanent property opens.

Macau has been running hot, with revenue up 44% in August and beating the most expectations, given the timing of the Beijing Olympics in August. But the City of Dreams pre-opening costs and late opening, now expected June 2009, will see small losses booked in FY09. Add further proposed visa restrictions for visitors from Guandong, which would certainly limit upside, and Macau becomes a major linchpin for the company.

Nonetheless, JP Morgan is very upbeat about the medium term prospects, predicting a profit growth rate of around 42% for FY10, once all of these issues are bedded down.

Citi is similarly upbeat, saying that despite the Macau risks, the significant discount to its valuation, an improving domestic outlook and the expectation of solid performances from The Meadows in Pennsylvania makes the stock attractive short-term. The longer term prospects from City of Dreams and Cannery, plus a diverse portfolio and clean balance sheet confirm its status as a Buy.

JP Morgan, the only other broker to have gone on the record this month, is in-line with the upbeat view, confirming its Buy on Tuesday. All in all, the FNArena database shows 8 Buys , with one broker restricted from making a recommendation. Targets range from $9.08 to $11.00 and as at 12:30 today, shares were trading 15c higher at $8.96 versus a 12 month trading range between $7.52 to $11.49.

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