Nomura has moved to downgrade the gaming and leisure sector as it believes the strong multiple expansion over the past six months now adequately reflects the robust fundamentals of the sector. They downgraded it to neutral from overweight.
Looking at the year ahead from a macro perspective, Nomura anticipates companies with strong free cash flows and sustainable dividend yields will continue to find solid support as the rotation from safety assets to high yielding equities continues. Tatts Group, Tabcorp and SKYCITY fit into the above classification.
"From a bottom-up perspective our forecast decline in disposable income for Australian consumers, expectations of rising unemployment and above trend operational expenditure growth (in electricity, among others) are likely to be detrimental to casinos’ top-line performance (relative to the more defensive cash flows of lotteries and wagering), and sector margins generally,” Nomura said.
The broker’s top pick in the sector is Tatts Group, which it upgrades to buy with a target price of $3.65 based on the above rotation theme. Nomura likes the double-digit earnings growth, yield growth and cost-out potential and believes the stock will continue to attract a premium multiple given its surety of cash flows and expected strong first half lotteries and wagering results.
Elsewhere, Nomura likes SKYCITY Entertainment Group and reiterates its buy recommendation and $3.75 price target. The broker believes the stock represents compelling value at current levels and sees an attractive growth profile on the back of the Adelaide Casino redevelopment.
On the downside, it retains its reduce recommendation for Aristocrat Leisure as it believes the stock is trading well above peer multiples with an inferior growth profile.
They also downgraded Crown to neutral from buy on the basis that the bulk of the good news is already priced in following the amazing 40.1 per cent gain since June 2012.
MARKETS SPECTATOR: Worth a wager
There is still value in many gaming stocks, according to Nomura, although the market is moving closer to reflecting the sector's true fundamentals.
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