Casinos: Interim results 2013
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It’s going be quite a battle. In one corner is James Packer’s Crown, in the other Echo Entertainment. Crown owns casinos in Melbourne, Perth and Macau. Echo’s properties are in Sydney, Brisbane and the Gold Coast. Now Packer has designs on opening a new 6-star hotel and casino complex on Sydney’s harbour, much to the chagrin of Echo.
For Packer this could be a life-defining project, a monument in his home town. There’s just one problem: Echo has an exclusive casino licence for NSW until 2019. Not to worry, the current state government is now considering using special powers to first approve the new development at Barangaroo, and somehow avoid it being defined as a casino.
A new Sydney casino seems a racing certainly. If so, who’s the better punt: Echo or Crown?
Key Points
- A new casino in Sydney is a near certainty
- Crown priced for perfection, AVOID
- Echo has potential for signifcant operational improvement, HOLD
Crown’s recent performance makes it worthy of consideration. Its casinos in Melbourne and Perth have continued to attract punters, helped along by an extended gaming floor in Perth and new entertainment options in Melbourne. Normalised earnings before interest, tax, depreciation and amortisation (EBITDA) for the half-year ended 31 December rose by 8.4% to $291.9m in Melbourne and by 5.4% to $122.9m in Perth.
| H1 2013 | H1 2012 | Change (%) | |
|---|---|---|---|
| Crown Melbourne EBITDA ($m) | 291.9 | 269.4 | 8.4 |
| Crown Perth EBITDA ($m) | 122.9 | 116.6 | 5.4 |
| Aspinall's Club EBITDA ($m) | 21.1 | 9.7 | 117.5 |
| Melco Crown (Crown's share of net profit $m) | 64.5 | 41.3 | 56.2 |
| Betfair (Crown's share of net profit $m) | -0.4 | 3.5 | n/a |
| Casinos EBITDA margins (%) | 28 | 28 | n/a |
| EPS (cents) | 24.8 | 36.6 | -32.2 |
| DPS (cents) | 18.0 | 18.0 | n/a |
| Franking (%) | 50 | 50 | n/a |
Elsewhere its Macau business is booming with rich Chinese flocking to the ex-Portuguese outpost. This helped boost dividends from Crown’s US$3.7bn (33.7%) stake in US-listed Melco Crown by 56% to $64.5m.
Refurbished Star could shine
Echo meanwhile has struggled. Its chief executive has been replaced and the managing director of The Star was stood down for ‘inappropriate behaviour’ at a work party. It’d be easily to declare Crown the clear winner.
Echo though has just finished a $870m refurbishment of The Star, and is slowly making inroads on repositioning it as an appealing destination for Sydney-siders and high spending VIPs alike. Early signs are promising. The redesigned premises has won a number of well-deserved awards, and normalised earnings increased 4.1% for the half just ended to $137.2m. But there’s still much to do.
| H1 2013 | H1 2012 | Change (%) | |
|---|---|---|---|
| The Star EBITDA ($m) | 137.2 | 131.6 | 4.1 |
| Queensland casinos ($m) | 72.8 | 68.4 | 6.0 |
| EBITDA margins (%) | 22 | 24 | -2.0 |
| EPS | 8.1 | 9.5 | -17.3 |
| DPS | 4.0 | 4.0 | n/a |
| Franking (%) | 100 | 100 | n/a |
New chief executive John Redmond appears to be the right guy to do it. Coming from MGM Mirage, he has deep operational experience in casinos. He plans to tighten Echo’s operational efficiency in an attempt to help boost EBITDA margins, which at 22%, lag well behind Crown’s 28% EBITDA margins.
Simple improvements can be made. Ensuring the right number of tables are open, focusing marketing on winning business from pubs and clubs, and repositioning the loyalty program to be more aspirational could all help boost earnings.
Elsewhere Echo is considering a redevelopment of the Treasury casino in Brisbane, contingent on finding a suitable new site.
Better odds
Successful investing is a process of placing unfair bets [Ed – just like a casino hey?]: heads we win, tails we don’t lose too much.
The market sees nothing but opportunity for Crown, and has priced it accordingly: with the share price rising 18% since 10 Dec 12 (Avoid – $10.19), the odds aren't stacked in investors' favour. AVOID.
| Sell | Above $5.00 |
| Hold | Up to $5.00 |
| Long Term Buy | Below $3.30 |
Echo’s share price on the other hand reflects mostly gloom. This is despite the fact that Crown could make another tilt at the company: a combined Crown/Echo could build a new Sydney casino more swiftly and would enable the businesses to better handle inbound VIP guests from Asia. Echo's earnings could also rise as Redmond executes on improving Echo's operations. The share price has risen 4% since 10 Dec 12, and there are plenty of reasons to HOLD.
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