Gaming Scores A Positive Outlook

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-Wagering/lotteries outlook mixed
-Casinos most robust
-Speculation on Crown/Echo continues
-No surprises from machine manufacturers

By Eva Brocklehurst

Things could happen this year at the gaming tables; there are plenty of potential catalysts. For those gaming companies reporting this month the brokers anticipate sound earnings but they differing as to the extent of earnings growth, where it will come from and which stocks in the sector they favour.

Deutsche Bank expects Tatts ((TTS)) and Tabcorp ((TAH)) could surprise to the upside, notwithstanding the loss of the Victorian gaming licences. Here, the two should benefit from robust wagering expenditure. Tatts has acquired Tote Tasmania and should sustain improving win rates at TattsBet, and a reduction in restructuring costs. Deutsche has a Hold rating on both. Macquarie expects Tatts to show solid results but rates it as a Sell, believing the shares are expensive.Goldman Sachs believes Tatts has earnings upside risk as online operations gain traction. This broker has a Hold rating on Tatts but a Sell on Tabcorp, viewing Tabcorp as having flat earnings, high debt and the most potential downside. Macquarie sees the issues and future catalysts for Tabcorpas  being a resolution of its agreement with TVN, possible extension of its retail exclusivity in NSW and potential co-mingling agreements with other offshore partners. The broker expects the first half results to be "messy" with the structure of Victoria's wagering business changing and the end of the company's pokies business in that state. Macquarie rates Tabcorp as Hold, sharing that rating on the FNArena database with four others.

Deutsche Bank expects Crown ((CWN)) and Echo Entertainment ((EGP)) will disappoint the market, affected by softening in revenue growth trends on the east coast and higher operating costs given expansion and refurbishment disruptions. Crown, nonetheless, remains one of its preferred exposures in the sector with a Buy rating. In fact, on the FNArena database Crown has seven Buy ratings and just one Hold (CIMB). Goldman Sachs expects casinos will lead on revenue and, taking a different tack to Deutsche, believes the refurbishments will drive stronger earnings this year. Macquarie expects Crown's high roller venture at Barangaroo will progress, but has concerns about the challenges for investment returns from the venture. The broker does admit there is not enough detail yet to be sure about this. Approval of this venture this year may be a catalyst for a negative stock reaction, according to Macquarie, as the challenges of the project are brought home. The broker also suspects it may be a negative for Echo, given likely impairment.

As for Crown's investment in Echo, Deutsche sounds a cautious note on this, seeing declining revenue at the Queensland casinos and softer-than-expected machine revenue growth at The Star. The broker notes this will be Echo's first result hosted by the new CEO. Although it may be too early for a new strategy, Deutsche expects an update on the status of Project Icon for the Gold Coast and Treasury casinos. Macquarie also sees a slowing of growth at The Star although Queensland, while still soft, should show improving momentum at the end of the half year. Goldman thinks merger speculation regarding Crown and Echo will continue this year and, while a takeover by Crown would be earnings dilutive, the broker still recommends Crown as a Buy. There are still robust multiples for casinos, the broker believes.

Regulatory approvals down the track for Genting Hong Kong and Crown to raise their stakes beyond 10% may provide some support for Echo, according to Macquarie. In the meantime, the broker rates the stock as Hold, along with three other brokers in the FNArena database. Here the outlook is more mixed compared with Crown, as Echo has two Sell ratings and two Buy ratings as well. Recent commentary from BA-ML on the Buy side notes the company has strategic value, although this could take time to materialise. On the Sell side, Credit Suisse thinks Echo is a difficult stock to assess, given the negotiations with the Queensland government and Crown's potential for competition in Barangaroo in NSW.

Deutsche expects SkyCity ((SKC)) will report a result slightly below the consensus, affected by lower-than-expected revenue growth at the Auckland and Adelaide casinos. Nevertheless, the broker sees defensiveness in the earnings base and strong cash flows. Hence a Hold rating. Goldman rates SkyCity a Buy, finding the stock's price/earnings multiples are supported by solid earnings growth – forecast at 7-9% in FY14/15. This broker sees earnings upside from the Adelaide casino redevelopment and the NZ National Convention Centre.

Macquarie finds valuations stretched for gaming equipment manufacturer, Aristocrat ((ALL)), preferring the casino operators. Deutsche uses the company's maintainable earnings as a valuation methodology, believing it has potential to grow market share. Macquarie notes Aristocrat will not report results this February, with a change to its year-end. It will hold its AGM on February 20. Macquarie has downgraded its recommendation to Sell from Hold, following the recent run up in the share price. On the FNArena database BA-ML also rates it a Sell. Deutsche's Buy rating is joined by UBS and Credit Suisse on the database. Ainsworth Game Technology ((AGI)) is not expected to deliver any surprises with its results but Macquarie will be interested in its progress on North American expansion. This stock is one of Macquarie's preferred plays, hence a Buy rating. BA-ML also rates Ainsworth as a Buy on the database while JP Morgan initiated coverage earlier this year with a Hold rating.
 

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