The chips are down for revenue-starved Echo

The departure of its chief executive after only 12 months in the job caps what has been a terrible year for Echo Entertainment Group.

John Redmond had been a non-executive director of Echo until festering tensions between Echo’s chairman John O’Neill and its then-CEO Larry Mullin saw Mullin depart and Redmond installed.

While Redmond’s resignation is for personal reasons – he’s returning with his wife to the United States – 2013 was a year that leaves a series of grave challenges for his successor, Echo’s chief financial officer Matt Bekier.

Despite the $800 million or so investment in its flagship casino, The Star in Sydney, Echo isn’t performing well. Today’s first-half earnings report shows earnings down 30.5 per cent.

Even if stripped of a one-off expense for closing out-of-the-money interest rate swaps and ‘normalised’ to reflect theoretical rather than actual win rates, earnings essentially flat-lined. Significant cost-cutting was unable to offset a slump in both domestic and VIP gaming revenues. A less-than-theoretical win rate in the VIP business didn’t help.

While O’Neill referred to soft underlying consumer sentiment across the group’s Sydney and Queensland markets, Echo’s performance at an operating level has been disappointing for some years.

By now, with its redevelopment behind it, The Star should be generating a return on the massive investment. Instead its revenues were down 6.5 per cent and its earnings before interest and tax 4.3 per cent. The Queensland casinos experienced an 8.7 per cent fall in revenue and earnings before interest, tax, depreciation and amortisation were down 15.5 per cent.

One of Bekier’s first tasks will be to find a new managing director for The Star to replace Frederic Luvisutto, who resigned just before Christmas.

If Echo’s challenges were purely operational, then better management could address them. Last year, however, fundamental strategic challenges emerged to the Echo businesses.

The most high-profile and contentious was the campaign by James Packer to obtain NSW government approval for Crown Resorts to build a $1 billion-plus high-roller facility at Barangaroo. Crown won a conditional approval for the six-star project, which will break Echo’s casino monopoly in 2019. Echo had resisted overtures from Packer that could have seen it partner Crown.

To make matters worse, Packer then turned his eyes on Queensland and, in particular, Brisbane, where the Queensland government has accused Echo of under-investing in its properties. It is now conducting a bid process for a new casino development. Echo has announced plans to spend $345 million upgrading its Jupiters casino on the Gold Coast and has sold its Townsville casino.

Once Packer out-manoeuvred Echo in Sydney, Redmond had said the group would invest up to another $1 billion in The Star and its precinct to counter the new Barangaroo facility. It could face an investment of a similar scale in Brisbane and also has to fund the Gold Coast upgrade. O’Neil said today the Echo board had started a review of its capital funding options.

The challenge for Bekier is encapsulated by a share price that has fallen about 35 per cent over the past year. The strategic setbacks, when added to the lacklustre operating performance, have compounded the degree of difficulty of raising capital on acceptable terms if Echo has to fund all the potential investments it has identified.

Malaysia’s Genting Group has a 10 per cent stake in Echo and is undergoing a very protracted regulatory approval process to allow it to lift its stake.  Echo may be forced to ask it for help.

The immediate challenge for Bekier, however, is to lift Echo’s top line.

The group has cut costs significantly – costs were down 4.8 per cent in the December half – but it is not going to improve its profitability. Unless Echo can generate some revenue and earnings growth, it is not going to improve its share price, create better funding options and a better capacity to defend its franchises against the far stronger Crown.