Tag Archives: Gaming

article 3 months old

Brokers Approve Crown Resorts Restructure

Amid a soft trading update, casino property operator Crown Resorts has outlined initiatives to simplify its business and enhance the balance sheet.

-Crown Resorts trading update suggests VIP turnover down sharply in year to date, amid softness at Perth casino
-New strategy a lower cost alternative to de-merger, given reduction in MPEL stake, abandonment of Alon
-Enhanced returns via buy-back and special distribution

By Eva Brocklehurst

Crown Resorts ((CWN)) has undertaken several initiatives to enhance shareholder value and restructure its business, including abandoning its Alon project in Las Vegas, reducing its stake in the Melco joint venture (MPEL) and offering a special distribution and buy-back.

The company has also provided an update on trading conditions in the year to date. Overall, normalised revenue for FY17 is down around 12%, principally from a 45% drop in VIP turnover and the, largely anticipated, softness in Perth. The company explains the magnitude of the decline in VIP turnover as exacerbated by a particularly strong prior corresponding period.

The company will sell 13.4% of its MPEL shares to Melco for $1.6bn, reducing its holding to 14% from 27.4%, and has entered into an underwriting agreement for the sale of an additional 2.8% to realise $290m. A swap arrangement for an additional 5.5% should reduce ownership further, to 5.7%. Closing the transaction is conditional upon the receipt of Macau regulatory approval and Melco's financing arrangements.

Proceeds will be used to reduce net debt by $800m and fund a special distribution of $500m as well as fuel a share buy-back of $300m. The special distribution is expected to be paid in the fourth quarter coinciding with the buy-back.

The transaction marks a significant restructure of the business mix, with around 95% of EBIT (earnings before interest and tax) now coming from the domestic portfolio. UBS also notes the strong signal that Crown is intent on reducing debt.

While exposure to longer-term growth in Macau has now been reduced, the broker expects the sale of the MPEL shares should be viewed positively by investors, given an implicit 30% discount that was applied to the shares within the company's share price.

UBS also believes the Alon project would have struggled to achieve a return exceeding the company's cost of capital. A sale of the Las Vegas land would be a positive for the broker's investment thesis

Macquarie considers abandonment of the Alon project a positive as the company is exploring alternatives to optimise the value including an outright sale. The broker estimates that Crown has invested $257m in the project and expects this to be recovered via a sale of the land.

Market Pleased With No De-Merger International

As a result of these latest initiatives the company has opted not to proceed with its proposed de-merger of international investments, which Macquarie believes the market will be pleased with. Still, this is insufficient to offset the re-basing of earnings expectations.

The company continues to prepare for the proposed IPO and disposal of a 49% interest in some of its Australian hotels and associated retail property, subject to prevailing market conditions. Macquarie suspects the process will be difficult, given rising bond yields, the macro environment and the status of the company's capital management program.

Macquarie downgrades to Underperform from Outperform, noting enduring weakness in Perth, lacklustre growth in Melbourne and fragility in VIP turnover underpin a weak outlook.

Deutsche Bank reduces forecasts for earnings per share by 2% to incorporate both the trading update and the initiatives. The broker maintains a Buy rating, as the stock is trading at a 20% discount to the revised valuation. The company envisages the sale will enable investors to better evaluate the financial and operating performance of the Australian assets and considers this a prudent alternative to the proposed de-merger.

The company will end up becoming an almost pure Australian casino play with no debt during FY18, Credit Suisse observes. The value apportioned to the domestic casinos supports the broker's valuation of the stock at around $13. Earnings per share are downgraded 7-10%, with the elimination of MPEL associate income and lower casino revenues partly offset by interest expense savings.

Credit Suisse does not model any permanent damage to the Crown VIP brand following the arrests of Crown personnel in China a few months ago and expects a recovery in VIP turnover over time.

Crown has achieved a significantly lower cost alternative, in Citi's view, with the benefits from the strategic initiatives outweighing earnings downgrades. The broker lowers FY17-19 forecasts for earnings per share by 13-14%. City retains a Buy rating, but valuation and target fall following the revisions to earnings forecasts and the incorporation of the reduced stake in MPEL.

FNArena's database has four Buy ratings, one Hold (Morgan Stanley, yet to update on the changes) and one Sell (Macquarie). The consensus target is $12.60, suggesting 13.6% upside to the last share price. Targets range from $10.95 (Macquarie) to $14.57 (Deutsche Bank). The dividend yield on FY17 and FY18 forecasts is 7.1% and 4.7% respectively.

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article 3 months old

Aristocrat Signals Strong Growth

Gaming machine manufacturer Aristocrat Leisure is guiding to strong earnings growth, as the performance of its key titles enable gains in market share.

-Investing heavily in Class III segment and still under-penetrated relative to competition
-Growth prospects diminish in digital but company can afford to invest in growing user base
-May need to diversify beyond slot machines to crack large markets in Asia


By Eva Brocklehurst

Gaming machine manufacturer Aristocrat Leisure ((ALL)) met lofty expectations to record strong net profit in FY16. The company has guided to continued growth, driven by expansion in the Americas and in the International Class III segment from new openings in the Asia-Pacific region.

Deutsche Bank likes the company's growth in recurring revenue and the strength of net operating cash flow, noting a cash conversion rate of 103% in the results. The broker also finds the company's outlook is more positive than usual and continued growth in market share and profitability is expected in 2017.

Aristocrat reported underlying net profit of $398m in FY16, up 69% and ahead of market estimates. Profit in the Americas was up 33% and Australasian profit was up 49%. Digital profit was up 135%. Despite the strength in the digital division, the company expects profit growth to moderate over 2017 as periods of high successive growth rates are cycled.

The main driver of market share gains in the Class III segment is the performance of the company's titles, UBS observes. While the broker acknowledges that all formats can be cyclical, Aristocrat's current business is taking share and momentum should continue for at least 12 months. The company is investing heavily in this area and still appears to be under-penetrated relative to the competition.

The business model has changed significantly, UBS notes, with recurring revenue likely to contribute more than 55% of group revenue in FY17. The price/earnings ratio being applied to the stock has remained relatively stable, at around 20x over the past three years, despite growth in earnings per share of 48% over that period. With this in mind, UBS believes the market might be underestimating the likelihood that there will be more than one year of strong earnings.

Macquarie believes the company's superior debt and liquidity metrics mean it is well-placed to grow and outmanoeuvre competition. The broker expects ongoing international expansion while dominance in the domestic market will be underpinned by a strong balance sheet.

The broker notes, aside from the growing digital market, the company made reference to flat markets in each of its operating areas. This reflects, in Macquarie's view, clear gains in market share by Aristocrat although it puts the onus on the company to continue developing highly popular titles to continue seizing share.

Credit Suisse expects Aristocrat can achieve around 20% in growth in earnings per share in FY17 as it harnesses the momentum in US recurring revenue, digital business and the International Class III. The broker upgrades forecast for earnings per share by around 11% but valuation is raised by a lesser amount because of rising bond rates affecting the company's cost of capital.

There are signs that growth prospects in the digital division are diminishing and by the company's own admission the social casino sector has begun to mature. Credit Suisse observes virtually no growth in daily active users among the company's publicly listed peers over the past six months.

While the daily users in the digital business were flat sequentially, the broker suspects the company has such a high margin and yield it can afford to invest to grow its user base. Nevertheless, Credit Suisse flattens its long-dated forecasts as the industry is not generating significant growth in users. Officially, the company's guidance is for maintaining average revenue per daily active user as it targets growth in its user base.

The broker suggests there might be an opportunity to target larger pools of users by launching new applications across several geographies and casino categories such as poker, bingo and card games. Aristocrat has recognised the need to diversify into multiple applications and enter new geographies but, Credit Suisse acknowledges, developing other forms of casino games is beyond the company's core competency in its development of high-performing slot content.

The broker suspects the company needs to diversify beyond slots to crack the large markets in Asia where local card games prevail. Credit Suisse's key reason to own the stock is the growth oriented strategy, balance sheet and merger & acquisition potential. The company has stated it is not averse to operating third-party content.

FNArena's database shows four Buy ratings and one Hold (Credit Suisse). The consensus target is $18.40, suggesting 22.7% upside to the last share price. This compares with $17.80 ahead of the results. Targets range from $16.50 (Credit Suisse) to $19.05 (Citi).

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article 3 months old

Treasure Chest: US Expansion Pays Off For Aristocrat Leisure

Aristocrat Leisure is broadening its portfolio in North America and it is paying off.

By Eva Brocklehurst

Gaming machine manufacturer, Aristocrat Leisure ((ALL)), is tackling market share, broadening its portfolio in North America. Market share gains are also supported by a favourable competitive environment, as three of its major competitors in the US are currently distracted by merger transactions. The acquisition of VGT, a US Class II game supplier, and entry into social gaming, adds to the stock's attractive earnings growth profile.

Citi believes the upcoming FY16 result should be a positive catalyst, expecting a comfortable beat to earnings guidance. This is because of ongoing momentum in North America. The transition to a new CEO is no major surprise to brokers and considered low risk in nature. Trevor Croker is believed to be a strong internal successor, well known and well regarded.

Credit Suisse concurs. Under Jamie Odell's leadership investment was encouraged and methodically allocated to both existing and new markets. The broker believes the signal is clear to investors, growth will continue but decelerate. Aristocrat has made large gains sourced from its maturing market share and medium-term growth is expected to be sourced differently.

The choice for the new leader is to either make further gains from the current array of products and geographies or also undertake significant investment in new segments. The broker upgrades FY17 volume and price expectations as channel checks suggest the company can at least hold its share, if not gain share next year. Credit Suisse also expects the company to significantly expand US participation in its installed base.

The broker assumes Aristocrat reaches an installed base in the US of 15,000 units by FY19. Even though a company may have a market leading product today, it ultimately reaches a point of saturation in terms of venue, the broker notes. Venues then seek and encourage alternative suppliers. While bulls would highlight that it remains early in the cycle, Credit Suisse calculates there are probably two more years of gains in market share.

The broker believes management needs to think about the longer term, in order to establish a new base for the company, and the new CEO will be quizzed for his thoughts about significant acquisitions. In making positive adjustments for FY17 volume and price expectations, the broker notes the Australian dollar has strengthened against the US dollar. Credit Suisse also lowers its digital growth forecast, observing a maturing of that industry.

Credit Suisse assumes volumes in Australia will taper in FY18 and FY19, as demand for replacement machines softens. Gaming turnover growth is also observed to be slowing. Deutsche Bank is more confident, noting that while domestic gaming revenue growth has softened in FY17 to date, it should remain robust and be reasonably supportive of Aristocrat Leisure.

Credit Suisse doubts the stock will exceed its recent price/earnings ratio as FY18 comes into view. The broker considers its estimates of the price/earnings (PE) ratio of 22 times earnings per share for FY18 as a peak for the stock, but acknowledges this could be maintained with a strong balance sheet and solid growth. Credit Suisse has a Neutral rating and $15.65 target.

Macquarie estimates the company will grow its North American ship share to around 27% by 2024, from 20% currently, as it builds on a low share of the stepper market and continues to grow its share of the Class III market. The broker believes the adaptation of two of the company's most popular titles to the stepper platform brings significant growth potential.

Buffalo Grand will be available on the VGT stepper platform from May 2017 and Lightning Link, which was recently voted as top game by customers, will be available on five reel stepper machines from July/August 2017. While competitors have launched linked games, Macquarie believes these lack the brand strength of Lightning Link along with the benefit of an early market entry.

The broker calculates a PE ratio of 20 on FY18 earnings estimates, in line with a long-term average, given ongoing earnings momentum and notable upside potential surrounding North American ship share and digital earnings.

Citi retains a high conviction Buy rating and $18.75 target, envisaging the current share price as attractive, with the stock trading around a price/earnings ratio of 19 based on its FY17 estimates. The free cash flow yield of 6.5% and strong balance sheet underpin the broker's conviction. Citi's estimates for FY16 and FY17 are 7% above guidance and consensus respectively.

FNArena's database shows four Buy ratings and one Hold (Credit Suisse). The consensus target is $17.80, suggesting 25.7% upside to the last share price. Targets range from $15.65 (Credit Suisse) to $19.70 (Deutsche Bank).

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article 3 months old

Weekly Broker Wrap: Jobs, Retail, Real Estate Listings, NBN And Equity Strategy

Employment numbers; consumer spending; slot manufacturers; real estate listings slowing; momentum in NBN share; is it too early to ditch yield stocks?

-Lower housing turnover foreshadowing weaker spending growth, Credit Suisse believes
-Aristocrat seen increasing share in North America, Ainsworth subdued
-Soft listings likely to have adverse impact on REA and Domain
-Telstra enjoying solid gains in NBN share, Vocus accelerating
-Bond yields unlikely to rise much and Deutsche Bank still values yield stocks


By Eva Brocklehurst


Commonwealth Bank analysts have examined monthly changes in employment, which show that annual employment growth has been propped up by two very big increases in October and November 2015. According to the Australian Bureau of Statistics, employment lifted by 49,000 in October and 65,000 in November. These very large monthly changes were both two standard deviation events, the analysts note.

While concerns abated about the reliability of the data with the passage of time, the analysts are reminded that these are now about to drop out of the annual calculations. They expect the annual pace of employment growth to slow to just 0.7% in November from 1.4% in September.

Such an outcome is expected to mean analysts and policy makers focus a little more on the pace of jobs growth and what this is likely to signal for output, inflation and rates.

Retail Consumption

Credit Suisse suggests, from its observations, that retail spending has stalled heading into the end of year despite official data that points to growth in labour income and solid gains in house prices. The broker believes the official data overstates the strength of the labour and housing markets and stagnation in consumer spending is consistent with an alternative view.

The broker observes a drop-off in housing turnover, even abstracting what is happening in house prices. Lower turnover foreshadows weaker spending growth, even if house prices do not fall. Credit Suisse suggests the Reserve Bank of Australia should pay more attention to the state of consumer spending. This is because the consumer still accounts for around 60% of GDP.

The broker's leading indicators point to slower spending growth in the foreseeable future, in part because labour and housing market conditions are softer than the official data suggests but also because turnover in housing is dropping away. Hence, Credit Suisse believes the RBA will need to cut rates further.

Slot Manufacturers

From a survey of the North American slot machine market in the September quarter, UBS notes that Aristocrat Leisure ((ALL)) added 815 leased games. The survey indicated that Aristocrat achieved 27% ship share in the quarter. This was 11% above its trailing 12-month ship share.

Ainsworth Game Technology ((AGI)) achieved 2.3% ship share in the quarter, 3% below its 12-month trailing average, which compares with 7% in the prior quarter based on the survey. The survey is consistent with the broker's view that Aristocrat is increasing its share in North America and provides further confirmation for Ainsworth's update regarding its soft quarter in the US.

Real Estate Listings

New listings in the national property market declined 3% in October, a slowing from the flat levels observed in September. This indicates a weak start to the second quarter and Deutsche Bank expects a continuation of this soft listing environment will have a further adverse impact on both REA Group ((REA)) and Fairfax Media's ((FXJ)) Domain. The broker lowers forecasts and price targets for both stocks to take this into account.

New listings growth in the capital cities was slightly lower than the national numbers, with Sydney continuing to show the most significant decline, down 16%. Melbourne was down 4%. The broker acknowledges this may simply be a reflection of a low point in the volume cycle rather than because of any structural factors.

UBS also notes a post-election rebound in residential new listing volumes still has not eventuated. This means there is downside risk to this broker's estimates for REA. Relative weakness in Sydney and Melbourne may impact overall yields for REA, given the higher absolute prices of depth products in these markets.

NBN & Telcos

From its observation of ACCC data, UBS gauges Telstra ((TLS)) continues to enjoy solid gains, with its share in the September quarter helped by the acceleration of the FTTN roll out. Vocus Communications' ((VOC)) share of NBN market growth is accelerating and UBS believes this reflects a strong portion of industry additions. As the company's NBN subscriber base builds, reducing churn will become an increasingly important driver of share growth, in the broker's view.

Shaw & Partners notes Telstra is defending its market share aggressively, adding 61% of NBN subscribers in the September quarter versus its market share of around 47%. Vocus is also doing well, the broker observes, adding 11.3% of subscribers versus its market share of around 7%. TPG Telecom's ((TPM)) quarterly additions are below its natural market share, the broker notes, although it is doing well in metro areas.

Goldman Sachs agrees that Telstra is growing its overall NBN share, now considered to be over 50%, while Vocus is building momentum. The broker highlights the fact that the latter's overall share is continuing to increase despite the company not looking to actively migrate existing subscribers to the NBN.

The broker also notes a relatively soft subscriber performance from TPG Telecom, offset by improved plan mix. Goldman believes up-selling to high-speed plans is important for the company's profitability in an NBN world. That said, TPG's iiNet looks to have had a soft quarter, with TPG's share in Western Australia declining by around 115 basis points to 38%.

Equity Strategy

Deutsche Bank believes it is too early to ditch yield stocks even though these have come under pressure in the past three months, coinciding with the rise in bond yields. The broker is not convinced yield stocks will fall further and believes it is appropriate to include a selection of these in portfolios.

The broker's US strategist highlights the still-substantial gap between dividend yields and bond yields. A hike to the US Federal Reserve's funds rates in December is considered likely, but the broker does not believe this automatically means bond yields should move higher.

In 2004 bond yields barely moved when the US Fed was raising rates, weighed down by a glut in global savings. Now the broker observes there is a glut of central bank liquidity. Money is leaving Europe and going to the US, which can keep a lid on long rates.

The broker notes a divergence with Australia, as the US Fed seeks to hike rates while the RBA is likely to cut. Deutsche Bank also detects some recent softening in the Australian economy, slower growth across retail sales, hours worked and credit. The broker does not envisage bond yields rising much, removing a catalyst for more under performance.

Yield stocks may even trade a little rich, given their scarcity value in offering a decent real yield. The broker's portfolio has a selection of Stockland ((SGP)), Telstra, Sydney Airport ((SYD)) and APA Group ((APA)).

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article 3 months old

Gaming Changer

If nothing else, arrests in China will dent Crown Resorts VIP revenue but has the stock, and sector, been oversold?

- Arrests not unprecedented
- VIP turnover to be impacted
- Crown share price plunge too extensive
- Star, SkyCity also oversold


By Greg Peel

It is illegal to promote gambling in mainland China but it is not illegal to promote tourism to a destination where gambling is promoted. Given eighteen employees of Crown Resorts ((CWN)) have been arrested in China for “gambling crimes” related to marketing, one might presume Crown may have strayed a little too far into this rather grey area.

The arrests are not without precedent. In June 2015, employees of South Korean casinos were arrested under similar circumstances.

Credit Suisse makes the point that the Crown employees arrested are only “suspected” of gambling crimes. This is important, the broker believes, in regard to how Australian regulators might react were a crime actually committed. Australian casinos promote “junkets” to the Chinese.

South Korean casinos no longer do.  After the 2015 arrests, South Korean casinos pulled all their marketing staff out of China. Star Entertainment Group ((SGR)) has temporarily pulled out the few staff it has in China in the wake of the Crown arrests.

In the quarter after the 2015 arrests, the VIP revenues from China for South Korea’s Paradise Casino fell 33%, Morgan Stanley notes. However in the quarter before, they fell 25%, so Morgan Stanley is calling only an incremental net 8% fall. Yet the Paradise share price fell 24% in the month after the arrests. VIP accounted for 87% of revenue.

But actual junkets – marketed in China – represented only 10% of all revenues, with the other 90% being direct business. So it’s all a bit messy in terms of what the true impact might be.

Credit Suisse believes Crown will at least suffer a reputational backlash in the near term as players and junkets avoid the group’s casinos temporarily, ahead of a multi-year recovery. Crown will probably have to adjust its operations in China, offering up liquidity risk. The broker now sees the group’s leverage ratio peaking at 3.0x, above the 2.5x required to maintain an investment grade credit rating.

The broker forecasts a 15% in VIP revenue and lowers its target on Crown to $12.30 from $13.00, retaining a Neutral rating.

Citi views the arrest as disruptive to Crown’s VIP business over the next 12-18 months. The broker has lifted its forecast decline in VIP revenue in FY17 to 8% from a previous 3.5%. This leads to a target price drop to $15.10 from $15.35 and a retained Buy rating. The 14% plunge in Crown’s share price yesterday affectively wipes out all expected VIP revenue, Citi notes.

Deutsche Bank has cut its target to $13.75 from $14.35 but on the share price reaction, upgraded its Crown recommendation to Buy from Hold. The broker believes Crown’s VIP turnover will reduce by 20% in FY17 as Chinese turnover falls 30%. Yet the share price reaction equates to a 70% loss of VIP revenue and a 100% loss from China, the broker calculates.

Deutsche notes that aforementioned South Korean casinos suffered a 17% net decline in VIP turnover and a 31.5% reduction in Chinese VIP turnover in the twelve months following the arrests.

Deutsche believes Star Entertainment will suffer a 25% decline in VIP revenue in FY17 with a 30% decline from China. The broker estimates VIP represents 14% of group earnings and China accounts for 80% of VIP turnover. Junket operators and players will be less inclined to travel to Australia, Deutsche suggests, while investigations are ongoing.

The broker has cut its target for Star to $6.25 from $6.50 and retains Buy.

Credit Suisse also had a $6.50 target for Star and has not made any adjustment. The broker retains Outperform.

Morgan Stanley suggests yesterday’s 5% in Star’s share price and 4% for New Zealand’s SkyCity Entertainment Group ((SKC)) mean a worst case scenario has already been priced in.

Morgan Stanley, too, has a $6.50 target on Star, and an Overweight rating. Indeed, Star is one of a handful of stocks in the FNArena database that presently has a full suite of Buy or equivalent ratings from each covering broker, albeit not all database brokers have updated their view post the Crown arrests.

The same applies for Crown itself. Following the Deutsche upgrade, Crown currently attracts three Buy and three Hold ratings. We will await further analysis and potential changes from brokers yet to report.

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article 3 months old

Weekly Broker Wrap: Strategy, Infrastructure, Wagering And Receivables

Unforgiving market continues; infrastructure sells off; flat outlook for construction; Canaccord Genuity covers receivables; Bell Potter initiates on TPI Enterprises.

-Stocks with valuation appeal and upgraded earnings likely to be the "new" defensive stocks: Macquarie
-Greatest downside risk to expectations in staples, A-REITs and industrials: Ord Minnett
-Infrastructure cash flow up but sector sells off on spectre of rising rates
-Banks can probably achieve strong CET1 ratios organically


By Eva Brocklehurst

Equity Strategy

Macquarie expects commodity, capital expenditure and consumer related stocks will be dominate themes through the next up-cycle but to achieve greater certainty on the trend requires more indication of where rates and the US dollar are going. Until more durable themes emerge, the broker expects the market to remain unforgiving, with much of the market upside in recent years driven by a bull market in defensive stocks.

Macquarie contends that disappointment over earnings is generally the death of high multiple growth stocks such as Aconex ((ACX)), CSL ((CSL)) and TPG Telecom ((TPM)) and bond yields are the death of high multiple dividend yield stocks such as Charter Hall Retail ((CQR)), GPT Group ((GPT)) and Scentre Group ((SCG)).

It will be stocks for which valuation appeal and/or earnings are being upgraded that will act defensively along with higher interest rates. Macquarie is looking for stocks where upgrades are accompanied by a low analyst forecast spread such as BHP Billiton ((BHP)), BlueScope ((BSL)), Downer EDI ((DOW)), Fortescue Metals ((FMG)), JB Hi-Fi ((JBH)) and Harvey Norman ((HVN)).

In the current environment the broker believes a bigger discount is needed for long duration stocks such as Macquarie Atlas ((MQA)), Sydney Airport ((SYD)) and Transurban ((TCL)). Among stocks which have suffered downgrades but greater price declines the broker likes Commonwealth Bank ((CBA)) and Telstra ((TLS)).

Ord Minnett concludes from its analysis that downside risk to consensus earnings per share (EPS) forecasts has increased and capital management prospects are diminished. Market expectations have, nonetheless, picked up thus far in September and the broker notes the materials sector is supporting a large proportion of the upgrade. Staples, A-REITs and industrial sectors are the areas in which Ord Minnett envisages greatest downside risk to consensus expectations.

Following a protracted period of elevated capital management, the broker envisages a deceleration in activity, particularly for consumer discretionary, energy and health care sectors. Ord Minnett retains a positive view across the China/steel/iron ore complex but remains modestly concerned about earnings being flat in energy and the risks of increased supply from Nigeria and Libya.


Lower interest costs have boosted cash flow for infrastructure companies but Deutsche Bank observes the sector has now sold off amid expectations interest rates globally will start edging higher. The broker acknowledges the companies will argue that cash flows will not be affected by rising interest rates until a majority of debt is refinanced but believes some of the terms and conditions may change.

Deutsche Bank calculates that much of the current available cash flow would need to be re-directed to pay back outstanding debt and this ranges from 15-49% of the current cash flow currently going to shareholders. The broker is not yet convinced rates will rise but, once they do, there is likely to be more than one rise to normalise settings. Moreover, the broker is not convinced rising rates will accompany materially improved growth and believes this is a reason the sector has sold off so sharply on just the spectre of rising rates.


UBS expects FY16/17 will be the bottom for total construction and the outlook is near flat. While construction is unlikely to return to the pre-GFC boom years the environment is still considered to be better than witnessed in recent times. The broker expects mining construction will remain in a slump out to FY18/19 and the drag will diminish as the segment becomes smaller. Housing is expected to flatten and turn down sharply in FY18/19.

The gaps may be filled if UBS is underestimating the structural support in the economy from ultra-low rates and foreign demand. Moreover, public construction is expected to provide a solid, if only partial, offset. Hence, the necessary filler will be the long-awaited recovery in non-mining business investment, the broker expects.


Deutsche Bank estimates that the Basel IV reforms will entail a 50 basis points impact on major bank pro-forma CET1 (common equity tier one) ratios and this fits with the capital build-up required to push the majors further into the top quartile of global ratios. The broker expects the impact can be offset by organic capital generation rather than on-market capital raising. This would also address APRA's call for the majors to be unquestionably strong on capital.

Deutsche Bank believes 50 basis points increases from an average second half of FY16 pro-forma CET1 ratio of 9.3% could be achieved organically over FY17-19 with only National Australia Bank ((NAB)) having to rely on discounted dividend reinvestment programs. This would be consistent with forecasts for CET1 ratios of almost 10% by FY19. Such an outcome could lend share price support to the sector.

The broker's top picks remain Westpac ((WBC)) and National Australia Bank.


Wagering revenue growth slowed to 5.7% in the second half of FY16, partly related to luck, with turnover up 16.9%. UBS notes growth continues to be driven by new entrants in the market as well as elevated levels of promotional activity from corporate bookmakers. UBS observes the shift in consumer preferences continues to evolve with digital betting taking a higher market share.

While this is outside of the control of Tabcorp ((TAH)) and Tatts ((TTS)) the broker still expects Tabcorp can deliver 2-3% revenue growth while Tatts is affected by a significant migration of tote to fixed odds betting that is causing structural pressure in terms of yield, ie a company-specific issue. Wagering for Tatts is expected to endure declining EBIT (earnings before interest and tax) over the next two years.


Canaccord Genuity estimates the investable market for debt ledgers in Australia is around $440m and around 80% of this will originate with the four major banks, GE Money and Telstra. As a result, unsecured personal loan and credit card balances represent the overwhelming majority of debt purchased in Australia in FY17.

The broker notes Credit Corp ((CCP)) is the largest purchaser of debt ledgers and has been able to expand its annual purchases consistently while maintaining the quality of its balance sheet. A Buy rating and $19.42 target kicks of the coverage of the stock.

Collection House ((CLH)) is likely to be the third largest purchaser this year. The company downgraded in FY16 and a reduction in purchasing activity was noted for the second year running. Management changes provide the opportunity to re-position the business, Canaccord Genuity believes and may also mean some near-term write downs. The broker initiates with a Sell rating and $1.06 target.

Pioneer Credit ((PNC)) listed on ASX in 2014 and is in the early stages of growth with a significant increase in ledger investments, which the broker observes have only just begun to be outpaced by annual cash collections. Canaccord Genuity initiates with a Hold rating and $1.85 target.

TPI Enterprises

TPI Enterprises ((TPE)) combines long-term growth outlook in healthcare with the volatility inherent in the agricultural sector and Bell Potter initiates coverage with a Speculative Hold rating and valuation of $3.17.

The exposure to agriculture relates to poppy growing in Australia, where local growers producer around 45% of the raw materials for narcotic production globally. Until recently this industry was confined to Tasmania. The company has now relocated to the mainland and the broker expects this move may increase the number of growers and result in a far more competitive environment, boding well for the TPI.

The Melbourne production facility is the first commercial scale, solvent free extraction plant in the world and, relative to other producers, its cost of production should be significantly cheaper at scale, Bell Potter contends, proving a sustainable cost advantage.

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article 3 months old

Star Entertainment Ascends On Buoyant Inbound Tourism

Star Entertainment is harnessing the buoyant inbound tourist market with its marketing strategy aimed at drawing more business into its casinos.

-VIP patronage in Sydney a highlight and The Star well placed for competition
-Benefits of Chinese tourism largely still to play out across all properties
-Plans to tap the under developed premium mass market


By Eva Brocklehurst

The Star Entertainment Group ((SGR)) is intent on harnessing spending from inbound tourists and has established a proactive marketing strategy aimed at increasing the amount spent in its casinos. Several factors have combined to make Australia a more attractive destination for casino visits, brokers believe, including increased investment in VIP facilities, increased business activity from China and improved airline capacity, along with deeper relationships with junket operators.

The company’s flagship property in Sydney, The Star, has grown market share to 9.1% from 0.7% over the past two years, UBS observes, with the venue boasting several advantages.Tables have benefitted on the main floor from strength in the Sydney property market and an improvement in the loyalty program, UBS contends. While the broker expects market share growth will slow it remains comfortable with a view that The Star will achieve a 10% share.

The highlight for Morgan Stanley from the FY16 results was the VIP patronage in Sydney, which grew 15% in the second half, versus a 10% decline in the broader Australian market. The broker suggests this is an indication of the “gateway” benefits offered by Sydney, as well as the company’s ability to attract VIP players. The theme is expected to prevail out to FY21 and also signals to the broker that The Star is set up well for new competition.

Morgan Stanley observes, at an FY17 price/earnings ratio estimate of 19x, competition and margin risks are adequately priced into the stock, with valuation still attractive. Mass casino patronage may have slowed in the second half and more normalised rates of growth in the first quarter around 4% are expected but Morgan Stanley remains constructive about the medium term.

The broker was also surprised to learn that tourists only account for around 3% of Sydney revenues, highlighting the fact that recent robust mass growth has been achieved just with core local patrons. Morgan Stanley believes the benefits from Chinese tourism growth are yet to be meaningfully felt and the investment to increase the company’s share of the Chinese tourist wallet and tap the under-developed premium mass market should drive further earnings growth and improve the defensive nature of the customer base ahead of the new competition in Sydney.

That said, costs could increase over FY17/18 as management develops its “premium mass” offering but Morgan Stanley remains positive about this investment, as the market is both lucrative and under-penetrated. Nevertheless, equally, there is little revenue to be had against the expenditure in the near term.

Credit Suisse notes two capex growth projects should drive earnings in FY17 and FY18, with the Sydney gaming floor expansion and premium status to improve the company’s capacity to attract low-tier players and upgrade players to premium clients. The broker notes the premium mass market in Sydney is around half as developed as that of Melbourne.

The second project, on the Gold Coast, is the company’s new six-star tower will introduce premium mass and VIP capacity. Management has indicated there is pent up demand for premium product in that jurisdiction. Credit Suisse is erring on the side of caution in its FY17 forecasts, given ongoing renovations and re-branding. The broker believes the company has sufficient funding capacity for the upcoming capital expenditure.

Given the disruption from capital works and increased marketing spending, Deutsche Bank reduces forecasts by 8% to reflect lower earnings from The Star and the increased investment. The broker does note competition in Sydney has been delayed to at least 2021 and the Queen’s Wharf project in Brisbane provides longer-term growth opportunities.

Macquarie envisages high growth in FY17 tourism revenue from increased spending and the tailwinds from hotel refurbishments, yet acknowledges the disruption is greatest for non-gaming revenues in Queensland. The broker highlights the Queensland VIP turnover, down 35.3% in FY16, does reflect a relatively small revenue base which is exposed to large fluctuations.

The impact of the hotel construction in the Gold Coast is expected to be felt in the first half before easing back in the second half. After that, the Gold Coast is expected to grow substantially, with the completion of the re-development at Jupiters anticipated in 2018 coinciding with the ability of this casino to participate in significant tourism growth. Planned seat growth from mainland China into Brisbane is reported to be 54% and Macquarie anticipates the addition of a six-star hotel on the Gold Coast will bring overall demand synergies and cross-selling opportunities.

Macquarie expects Sydney to continue its high levels of growth derived from overseas visitors in FY17, albeit at more modest levels in the second half as the company starts to cycle a sustained period of exceptional international growth.

Morgans tempers earnings forecast because of the increased costs associated with the brand and loyalty strategy and the interruptions with the refurbishments at both The Star and on the Gold Coast. The broker expects operating leverage to return to the business from FY18 following the completion of the capital works.

FNArena’s database shows six Buy ratings and two Hold. The consensus target is $6.48, suggesting 6.7% upside to the last share price.

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article 3 months old

NT Ban Positive For Tabcorp, Tatts

-NT heading off federal intervention?
-Should arrest decline in TAH, TTS share
-Removes corporate bookmaker advantage


By Eva Brocklehurst

The Northern Territory government has surprised the market, initiating its own action as a result of the Commonwealth government's 2015 review and response to the impact of illegal offshore wagering.

The NT government has sent a letter to bookmakers telling them to stop offering click-to-call services within 28 days. Brokers consider the development augurs well for both listed wagering operators, Tabcorp ((TAH)) and Tatts ((TTS)).

Click-to-call enables customers to place a live bet via a smartphone, without talking to an operator, using the latest online and phone technology. UBS considers the ban by the NT government carries more weight than the Commonwealth's response because of the potential risk to licences, estimating the turnover from click-to-call products could be up to 10% for bookmakers offering the product.

This is significant, the broker contends, given the product only really works with sport, which is 25-40% of the volume for most bookmakers. The product has partly cannibalised other sport bets and, while low margin, is a key differentiator for those that offer it.

Tabcorp and Tatts do not offer a similar product - they take “in play” bets over the phone. Hence, UBS suspects the market share lost over the past 12 months as a result of not offering the product should ease back if click-to-call products are withdrawn. Citi also believes the levelling of the playing field is a small positive for both Tabcorp and Tatts.

The NT government decided to take immediate action to possibly head off future intervention by the Commonwealth, which may ultimately result in control of regulation of the online wagering industry at a federal level. The NT government stated it intends to show it is capable of regulating the industry responsibly without need for federal interference.

Deutsche Bank understands the NT action was prompted by suggestions from the NT Racing Commission that these bookmaker services should be stopped to head of future federal intervention in the territory.

The Commonwealth has indicated as a result of the review it considers click-to-call, in-play betting to be breaching the provisions and intent of the interactive gaming act, with plans to introduce legislation to clarify the act. Yet, it did not offer a formal time frame for operators to discontinue the offering.

The current federal minister responsible for the portfolio has reportedly welcomed the NT decision, stating the current government, if re-elected would introduce these laws clarifying the act as soon as possible.

Deutsche Bank agrees the ban would remove an advantage the corporate bookmakers currently enjoy. The NT amendment would prohibit a bookmaker accepting a bet on a sporting event, after the commencement of the event, in a manner that uses a recorded or synthetic voice. The broker also highlights the Federal Court has imposed a $2.75m penalty on Bet365 for misrepresenting a free bet offer.

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article 3 months old

Weekly Broker Wrap: Oz Health, Gaming, Pacific Smiles And US Housing

-Lower health claims flagged by nib
-Yet hospital growth seen solid
-Positive signals for gaming
-Material expansion likely for PSQ
-Brokers optimistic on US housing


By Eva Brocklehurst

Australian Health Care

The improved claims experience cited by nib Holdings ((NHF)) is difficult to extrapolate across the sector, Goldman Sachs maintains, given the company has less than 10% market share in private hospital operators and its policy holders are predominantly in NSW.

In theory, the broker notes, lower claims growth for health funds should mean lower revenue growth for the private hospital industry. Yet the December half revealed this is not necessarily the case in terms of lower revenue growth and/or margins for listed operators Healthscope ((HSO)) and Ramsay Health Care ((RHC)).

Although private hospital payments make up the bulk of health insurance claims, doctor fees and payments to ancillary services are also large segments. Goldman Sachs observes public hospitals also account for 10% of insurance payments to hospitals.

The broker observes anecdotal evidence suggests hospital volumes grew solidly for a number of operators in the March quarter. Hence, Goldman Sachs makes no changes to its Healthscope or Ramsay Health Care forecasts.


Victorian gaming machine expenditure rose by 2.3% in March, slightly below Deutsche Bank's expectations. The broker notes Crown Resort's ((CWN)) Melbourne casino expenditure is growing in excess of this rate.

After a strong FY15 the broker notes domestic gaming machine expenditure remains firm, with NSW, Queensland and Victoria all showing growth. Deutsche Bank believes this is a positive signal for the casino operators and equipment manufacturers.

Pacific Smiles

The dental centres in the Pacific Smiles Group ((PSQ)) portfolio offer a superior consumer experience, in Morgan Stanley's opinion, and there is scope for five times the number of centres, supported by demand and low government funding risk.

There is flexibility for dentists and value for insurers as well, the broker maintains. The industry is considered to be large, fragmented and relatively defensive with corporatised models comprising a very small percentage. This presents scope for consolidation.

Morgan Stanley initiates coverage on Pacific Smiles with an Overweight rating and target of $2.50, expecting material expansion in the long-term margin and returns on investment.

US Housing

US new home sales missed expectations in March. Morgan Stanley observes growth has been decelerating for the past four months. The broker notes around 75% of single family starts in the past year have been built for the “for sale” market. On that basis the March data signals a significant increase in sales is required to support the current level of building.

The broker remains positive on the US housing outlook, with mortgage purchase applications rising solidly to a six-year high monthly average in March. Despite expectations that James Hardie's ((JHX)) fourth quarter will show weaker volume growth, Morgan Stanley expects a solid profit outcome.

Deutsche Bank reduces housing starts forecasts by 2.0% for 2016 with forecasts for 2017 relatively little changed. This broker, too, remains optimistic on US housing despite the minor downward adjustments. Growth of 11% is expected in FY16 and FY17.

The broker makes minor changes to earnings estimates for Australian stocks on the back of the US data, with a 1.0% decline in its James Hardie target a result of Australian dollar translation. The broker believes the downside risks for Boral ((BLD)) include pricing weakness in cement and concrete in Australia as well as a slower-than-expected recovery in the Australian and US housing market.

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article 3 months old

Weekly Broker Wrap: Aquaculture, Slots, Retail, Sharing Economy And Investment Strategy

-Balanced outlook for salmon
-Aristocrat likely to retain dominance
-China tax policy tempers tourist outlook
-International retailer assault to continue
-Property services negative re sharing economy
-Australia a preferred market for investment


By Eva Brocklehurst

Aquaculture Producers

Tassal Group ((TGR)) has withdrawn from domestic retail supply tenders to Coles, indicating to Credit Suisse a previously signalled unwillingness to tender at sub-optimal levels relative to other channels.

The broker was surprised, nonetheless, that the entire contract to Coles changed hands. It appears Petuna has secured the fresh deli contract. Credit Suisse does not believe the Simplot contract has been finalised yet but expects it to go to Huon Aquaculture ((HUO)).

Tassal has also noted supply restrictions and increased pricing as a result of the impact of the long hot summer, which Credit Suisse believes applies to all operators. Importantly, while growth has been affected, mortality levels have not.

The broker reduces expectations in terms of volumes and margin assumptions, with a negative earnings revision for Tassal of 5.0%. Gaining additional retail exposure is considered a positive for Huon, as is reduced competition in wholesale channels. The broker considers the industry supply and demand outlook is increasingly well balanced.

Slot Machine Makers

Macquarie's analysis suggests Aristocrat Leisure ((ALL)) has continued to take market share at the expense of Ainsworth Game Technology ((AGI)). The broker notes patent applications and absolute R&D spending signal Aristocrat can maintain its dominance.

Both companies have strong balance sheets and liquidity which, combined with increased annuity earnings, suggests to the broker that compared with global peers, the Australian manufacturers are likely to increase ship-share in both Australia and North America.

Macquarie upgrades Aristocrat to Outperform (from Underperform) as the trends are clearly supportive form an earnings and sentiment perspective. The broker downgrades Ainsworth to Underperform (from Outperform) as in contrast, market share and momentum are considered headwinds.


Bell Potter considers it appropriate to compare real estate business McGrath ((MEA)) with offshore listed comparables rather than other consumer facing stocks in Australia, as none of these operate within the Australian residential real estate market.

Key offshore peers include Realogy, Foxtons and Countrywide. The broker notes the price/earnings ratios for these stocks on FY16 and FY17 forecasts are well above the average for McGrath.

Bell Potter retains a Buy rating and $2.25 target and continues to believe the company will at least achieve its pro forma prospectus forecasts in FY16, believing it undervalued in both a relative and absolute sense.

Australian Retail Property

New Chinese tax policies could temper the outlook for tourist oriented shopping malls, Morgan Stanley contends. New taxes for cross border e-commerce and international parcel deliveries become effective on April 8.

The broker suspects stricter enforcement and increased scope and quantum of the tariff on imported goods could reduce demand for goods purchased from offshore and outbound tourism.

Tourist exposed centres account for around 20% of the Australian Real Estate Investment Trust retail stock. GPT Group ((GPT)) has the highest exposure by portfolio value, Morgan Stanley observes. Vicinity Centres (VCX)) has the largest number of malls.

With redevelopments increasingly relying on the introduction of new luxury retailers the broker questions the potential risk/reward of future development activity.

Discretionary Retail

Macquarie has analysed the recent financial performance of the international retailers H&M, Zara and Uniqlo. Cumulatively these earned $460m in sales across 29 stores in their latest financial year results. They continue to add competitive pressure to the department and discount department stores as the majority are co-located.

Sales of the three have deteriorated from initial elevated levels, Macquarie observes, with some cannibalisation and lower sales productivity expected as they expand into the suburbs from more productive CBD locations. Still, the broker does not expect this to deter the continuing trend of offshore retailers entering the Australian market.

In terms of the listed property sector, these international stores are typically anchoring retail development activity in Australia, the broker notes, and taking market share away from domestic retailers.

The broker is concerned about the impact, given their typically low price points, which means domestic competitors cannot raise prices to offset the cost of goods impact of a lower Australian dollar. Increased financial stress is considered likely in domestic specialty apparel chains.

Moreover, international retailers are receiving generally lower rents and higher incentives which will continue to hinder shopping centre development returns in Australia. That said, the cost of doing business for these retailer in Australia is expensive, and returns are expected to moderate.

Sharing Economy

This is a rapidly growing economic model based on access to, rather than ownership of, physical and human assets such as time, space and skills. Examples are Airbnb, where people can list and book accommodation, and Uber, the ride sharing application.

Advances in technology, spearheaded by the internet, have enabled the economy to grow. As a result, some traditional business models have been disrupted while for others it provides a cost effective platform with which to compete.

Among the key findings of the National Australia Bank's report on the sharing economy, the analysts note that while large firms are the most positive about the impact, small firms are the most confident going forward. This may reflect the fact large firms have a better understanding of the sharing economy, as none of them signalled a lack of knowledge.

Small firms operating in the health services and construction industry indicated a lack of knowledge about the impact of the sharing economy on their business. Overall, around one in 10 Australian firms believe the sharing economy had an impact on their business over the last 12 months.

Businesses operating in the property services industry were the most negative in regards to the impact followed by retail businesses.

Investment Strategy

Participants at Credit Suisse's Asian Investment Conference were bullish regarding the short term but cautious for the long term. The broker suspects Chinese stimulus measures have caused many investors to re-assess their near-term outlook as there remains a considerable overhang of debt and an unbalanced economy.

Australia is now a preferred market in the region but investors are cautious regarding materials and financials stocks, which make up two thirds of the benchmark. The broker observes foreign investors are not smitten by the sector mix in Australia but suspects they want to gain exposure to the appreciating currency and the highest dividend yields in the region.

The relevant presentations at the conference for Australian investors included evidence that VIP gaming volumes in Macau should gradually recover. The acquisition criteria for the Hong Kong Exchange suggests to the broker it would not be interested in ASX ((ASX)) while Singapore Telecom's Optus is looking to differentiate its business in Australia via content. The recent acquisition of English Premier League rights for Australia is part of this strategy.

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