Australia | Nov 11 2013
-Poor recent trading momentum
-Subdued consumer again blamed
-Lacks clarity on investment value
By Eva Brocklehurst
Unfortunately, Echo Entertainment ((EGP)) doesn't have a Macau casino investment to offset the subdued environment in Australia. The company's momentum has taken a jolt in the last month or so, with its casinos affected by a sharp slowdown in the volatile VIP segment. The subdued update delivered at the company's AGM was not that surprising to most brokers, given the tough background cited by several others in the gaming sector, including soon-to-be Sydney competitor, Crown ((CWN)).
Echo is a pure casino story, with its four properties – Treasury in Brisbane, Jupiters in Gold Coast and Townsville and Star City in Sydney, enjoying monopoly status – for now.
The company has indicated that growth has slowed significantly in recent weeks after a strong start to FY14. Normalised gross revenue is down 3.5% to October 31 2013. It's the VIPs that have dropped off, but comparatives are also affected negatively by the shift in marketing strategy last year and a large pay in slot machine jackpots in October. Then there's the time-worn comments about subdued consumer spending.
In Queensland, the company has stated it will consider investment levels of around $1.5 billion to refurbish its properties and will progress with proposals to the Queensland government for the Brisbane precinct redevelopment. The quantum of that investment amount did cause the market to catch its collective breath. BA-Merrill Lynch notes the Queensland properties in Brisbane and Gold Coast were due for re-development and management had flagged this for some time. It's just that the visibility regarding the potential return on that investment is lacking, as commentary from the Queensland government has signalled the potential for new entrants in the Brisbane market.
Merrills admits the company needs to show a high profile commitment to its properties and the long-term viability of the business in the face of any competition threat in Brisbane but further news on such competition is not expected in the near future. The company is also dogged by uncertainty because of competitor plans in Sydney. The Star complex has recently been revamped but will be competing with Crown's Barangaroo from 2019.
In Merrills' opinion there's no catalysts for a near-term re-rating and also less strategic value in the stock now that Crown has made an exit from the register. Merrills has downgraded earnings forecasts in the wake of the AGM update, by 6% for FY14 and 8% for FY15, but concedes there is a lot that's discounted in the current valuation.
UBS has also lowered forecasts and assumes 5% earnings growth for FY14. Whilst Echo has valuation appeal, the broker thinks recent comments by the Queensland government add a layer of uncertainty in terms of the potential for new entrants in the Queensland market. The company is also facing uncertainty in terms of Crown Sydney's impact on Star's earnings from FY20/21. Echo trades on a FY14 price earnings multiple of 14.8 times according to UBS estimates, a discount to Crown and Sky City. On a FY14 enterprise value/earnings estimate, Echo's 6.1 times multiple compares with 8.8 times for Crown (ex Macau) and 9.2 times for Sky City.
Macquarie expects earnings growth in the first half of 10.7% and believes that comparatives will get better over the rest of the year. The broker is content to retain an Outperform rating, although expects poor trading momentum and concerns over the investment in Queensland to weigh on the stock near term. UBS also has a Buy rating. As it stands on the FNArena database there are three Buy, four Hold and one Sell (JP Morgan). The consensus price target is $2.91, suggesting 18.6% upside to the last share price and compares with $3.00 ahead of the AGM.
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