Echo: Profit Upgrade
Recommendation
Echo Entertainment’s share price increased 8% after announcing that its full year underlying profit is expected to be $150-153m, up from $127m last year and well ahead of broker estimates. The more volatile VIP business could still impact the result, but in the calendar year to May revenue has increased 10% in contrast to recent results from several discretionary retailers. New chief executive Matt Bekier is off to a great start, but ultimately he needs to improve performance at The Star casino in Sydney and successfully negotiate the fluid situation in Queensland, particularly in Brisbane. Echo owns several casinos in Queensland, including the Treasury Casino in Brisbane which might be rendered redundant due to the new casino proposed for Queen's Wharf. Echo remains in the race to develop the new casino and is trying to stitch up a deal with rival bidders as Echo's finances have been stretched by the redevelopment of The Star and refurbishment plans for its Queensland casinos.
The stock is up 12% since it was initially upgraded in Echo worth a shout on 23 Sep 13 (Buy – $2.68) putting it on a forecast price-to-earnings ratio of 16, which seems more reasonable. While the business should be able to increase profits further over time, we're cognisant that the industry is in a state of flux and Bekier is unproven. With the share price increasing 8% since Echo Entertainment Downgraded from 3 Jun 14 (Hold – $2.80) we’re sticking with HOLD.