Echo's AGM update and QLD plans
Recommendation
Casino owner Echo Entertainment released an unexpectedly negative trading update at its annual general meeting. Punters aren’t flocking to its recently renovated Sydney casino, The Star, as hoped, or its Queensland properties in fact, causing revenue to fall 3.5% in the first four months of the financial year. However, earnings before interest, tax, depreciation and amortisation actually rose, thanks to management's aggressive cost-cutting program.
The announcement didn't say much about what caused the revenue fall, referring only to ‘subdued consumer spending’. We suspect most of the loss was in the non-VIP business and the Queensland properties, which are sorely in need of renovation.
Management evidently agrees, and it unveiled upgrade plans for Jupiters on the Gold Coast and the Treasury Casino in Brisbane. Three new hotels will be added to the Jupiters Gold Coast site, including a fancy six-star offering and a host of retail and dining options to help woo international tourists. The plan for Brisbane is to turn the current Treasury Casino into a six-star hotel and separately build a new casino. Hotels and casinos don't come cheap and this plan will cost Echo up to $1.5bn. The idea is to meet part of this cost by selling Jupiters in Townsville, a move we’d support.
What’s been presented so far appears sensible, although very conceptual at this stage, and we'd need more details to judge the merit of any new investment. For now, with its share price down 5% since Echo's fight moves north on 16 Oct 13 (Buy – $2.58) Echo remains a BUY.
Note: Our model Growth Portfolio owns shares in Echo Entertainment.