Stakes Raised In Australian Gambling Market

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-Macau strength benefits Crown
-Aristocrat, Ainsworth well placed for expo
-Mobile platforms grow wagering market
-UK online tax has significant implications
 

By Eva Brocklehurst

Gambling in Australia may be a little subdued but it's going gangbusters in Macau. Macau's gaming growth in the last four months beat Citi's forecasts by 2-4%. This was attributed to increasing visits from mainland China, helped greatly by the completion of the Guangzhou-Zhuhai railway in December 2012. During July and August, Macau's gaming growth rate was 18.7% year on year. Citi expects the strong momentum to continue as visitors can now spend more time at casinos, especially during peak periods such as Golden Weeks. The broker has now raised the forecast 2013 Macau rate of gaming growth to 17% from 15%, expecting it to reach US$44 billion.

It says it all really for Crown ((CWN)) and the benefits arising from the Melco joint venture. Hence the stock is a preferred exposure for Deutsche Bank. Australian gambling expenditure is expected to stay subdued through  the rest of 2013. Perth has the higher growth market in Australia and Crown has introduced some cost reductions to offset the weaker top line trends at Crown Melbourne. The broker suspects general weakness in Australian gambling expenditure can be attributed to the cycling of higher comparatives, deteriorating consumer confidence, increased unemployment, and lower growth in average weekly earnings. Victorian gaming machines have also been impacted by regulatory changes.

Australian gambling expenditure continued to deteriorate throughout the June quarter and this appears to have continued through July and August. The weakness previously seen in gaming machine expenditure has also impacted gaming tables, and Deutsche Bank notes a softening in wagering and keno expenditure. Conversely, lotteries expenditure has remained buoyant, although the broker thinks this can largely be explained by a favourable jackpotting sequence. Another stock that should benefit from a global reach is Aristocrat Leisure ((ALL)). Deutsche Bank notes Aristocrat generates just 27% of group earnings from Australia. The depreciation of the Australian dollar will assist Aristocrat with every US1c change impacting earnings by 1%. Deutsche Bank believes the company is well positioned for the medium term given recent talent retention and acquisitions in the online segment.

The global gaming expo kicks off in Las Vegas on September 23 and BA-Merrill Lynch thinks both Aristocrat and Ainsworth Game Technology ((AGI)) will feature well, with strong product offerings. The demand is more mixed for casinos, in the broker's view. There are many anecdotes of slot floors shrinking, with a focus on quality over quantity, and this suggest the US replacement cycle is unlikely to show any meaningful improvement in the medium term. Pricing is another issue, as there has been a surge in new entrants, with 23 players against just five a year ago.

Still, Merrills believes Aristocrat and Ainsworth are on the right track and growth will have to come from market share gains. Aristocrat is increasingly homing in on the entertainment space while Ainsworth has many new titles and hardware configurations. Underpinning this confidence, Merrills has upgraded earnings forecasts for both companies, by 2% for FY14 in the case of Aristocrat and 0.4% for Ainsworth. The broker prefers Ainsworth, given the stronger forecast 16% compound earnings growth rate for FY13-16 compared with 10% for Aristocrat.

What about Australian wagering? Underlying wagering growth is expected to remain soft in the medium term with market share to be aggressively fought over, according to Merrills. Lotteries are encountering tough comparatives as the number of jackpots at, or above, $15m in the first half of FY14 so far have totalled six. In the prior comparative half there were 21 jackpots at, or above, $15m. Macquarie sees the market as robust despite macroeconomic headwinds. Australia's wagering market recorded revenue growth of 3.8% over the past 12 months.

Macquarie notes the rapid adoption of mobile wagering platforms, a focus on increased yields from all operators, as well as some luck emanating from racing results. In terms of mobile, this is now a $3bn wagering market with Tabcorp ((TAH)) the market leader. Macquarie estimates there is now $3bn of wagering turnover via mobile platforms, up 163% in FY13. Mobile growth is being driven by growing smart phone penetration, its convenience and an improvement in the user experience. So far, there is evidence that mobile platforms are growing the overall market for wagering, as well delivering above-average yields for operators.

From a market share perspective, Tabcorp increased its revenue share by 140 basis points over the past 12 months. This was partly from direct benefits from wholesale turnover after the sale of Tote Tasmania, as well as a growing contribution from its international wagering pool in the Isle of Man. For Tatts Group ((TTS)), its revenue share during FY13 was stable at 17.6%, despite the added benefits from a full year of owning Tote Tasmania. The broker thinks consolidation is creating a more rational environment. This year has seen a number of high profile transactions completed in the wagering market, driven by UK operators William Hill and Ladbrokes.

Regarding the UK, there are draft changes to online gaming tax which will, in CIMB's view, have significant implications for Australian online wagering, by further attracting sophisticated new entrants and permanently changing the industry structure. These new entrants operate on significantly lower win margins compared with incumbents. They also offer more products on sophisticated platforms. As a result, the broker believes the market is not correctly pricing this risk for Tabcorp and Tatts. This underscores CIMB's Underperform call on the stocks and Underweight stance on the sector. The key point from the UK government's draft online gaming bill is the proposed "point of consumption" 15% gross profit tax on UK-based revenue from December 2014. This closes a loophole in the UK that allowed most gaming companies to avoid tax as UK customers were technically betting offshore. This implies a significant loss of earnings for the major UK online bookmakers, particularly for Betfair.

CIMB suspects that Betfair may want to increase its offering in the Australian market, particularly given the new CEO's expertise in the Australian online wagering segment. A rejuvenated Betfair Australia would further intensify the competitive environment in online. Indeed, the UK companies have responded to the tax plans with offshore expansion into large regulated markets such as Spain, Italy and Australia. CIMB thinks, given its betting culture, relatively young online market and competitive structure, that Australia is the most attractive option. Hence, the recent arrival of William Hill, through the acquisition of Sportingbet and Tom Waterhouse, and Ladbrokes, via the acquisition of Gaming Intelligence. They join Paddy Power which entered the market in 2009 via Sportsbet.
 

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