Echo plan a value loser: analysts
Echo, which owns the Star, this week unveiled its defence against losing its gambling monopoly to an encroachment by Mr Packer, dangling before the state government the idea of allowing both casino developments to go ahead.
But this "third way" proposal by Echo would still deliver a second casino into the Sydney marketplace - albeit with some restrictions on Crown's table games and access to VIPs - further squeezing the sector.
Analysts have also questioned the economics of Echo's main proposal put to a state panel, by which it would retain its casino exclusivity licence in NSW by investing $1.1 billion to develop a hotel, restaurants and entertainment precinct and public infrastructure. The bid would come with an extra kick of $250 million paid to the state government to extend its monopoly exclusivity for 15 years and block Mr Packer from developing his own casino at Barangaroo.
"An exclusivity payment effectively lowers the valuation upside to the company if their proposal wins by 30¢ per share," said Citi analyst Michael Goltsman.
Bank of America analyst Mark Bryan said: "While Echo's proposal appears impressive and a competitive alternative to Crown's Barangaroo, returns could be challenged.
"While we do believe that the hotel roll-out has strategic merit in the underpenetrated Sydney market, we see scope for higher returns to be challenged ... Star would need to more than double its VIP business to keep the project return on invested capital (ROIC) accretive.
"We estimate around 250 per cent growth in 2018-19 VIP revenue is needed to drive a ROIC of 10.3 per cent."
Deutsche Bank analyst Mark Wilson said Echo's approach was "strategically astute but ultimately low returning".
"The proposal allows the NSW government to approve the projects of both Echo and Crown with a combined budget of $2.3-2.6 billion and it will ensure increased development and connectivity.
"Additional concessions are required to ensure an appropriate return is generated and they could encompass a lower gaming tax and other regulatory changes as there is no cap on the number of table and electronic table games."
Shares in Echo closed up 3¢ at $3.02, Crown ended down 34¢ at $11.50.
Frequently Asked Questions about this Article…
Echo Entertainment (owner of The Star) has proposed to retain its NSW casino exclusivity by investing about $1.1 billion to build a hotel, restaurants, an entertainment precinct and public infrastructure, and by paying an additional $250 million to the state to extend its monopoly exclusivity for 15 years and block Crown from developing a rival casino at Barangaroo.
Echo's "third way" would still allow a second casino into the Sydney market but would impose restrictions on Crown's table games and access to VIPs, which analysts say would further squeeze the sector and limit Crown's ability to compete freely at Barangaroo.
Analysts have questioned the economics. Citi warned the exclusivity payment reduces valuation upside, Bank of America said returns could be challenged and Star would need to more than double VIP business, and Deutsche Bank called the approach "strategically astute but ultimately low returning."
Citi analyst Michael Goltsman said the exclusivity payment effectively lowers the company's valuation upside by around 30 cents per share if the proposal wins.
Bank of America estimated that around 250% growth in 2018–19 VIP revenue would be needed to drive a return on invested capital (ROIC) of about 10.3%, meaning Star would need to more than double its VIP business to make the rollout accretive.
Deutsche Bank suggested additional concessions could be needed to generate appropriate returns, potentially including a lower gaming tax and other regulatory changes, noting there is currently no cap on the number of table and electronic table games.
Deutsche Bank said approval of both Echo and Crown projects would create a combined development budget in the range of $2.3 billion to $2.6 billion, which the bank said would increase development and connectivity in Sydney.
On the day reported, Echo shares closed up 3 cents at $3.02, while Crown shares fell 34 cents to $11.50, reflecting investor reaction to the proposals and analyst commentary.
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