Among casino stocks, Crown Resorts and The Star Entertainment Group are the headline acts. Smaller operators such as SkyCity Entertainment Group get less market attention, even though some are turnaround prospects and have takeover potential.
The casino sector has a few tailwinds. The first is the boom in inbound tourism in Australia – a megatrend I have written about several times for The Switzer Report over the past few years. More international visitors mean more casino patrons.
The tourism boom has a long way to run as a further two billion Asians join the middle class by 2030, on OECD forecasts. There were 8.7 million visitor arrivals in the year to October 2017, up 7.1% on the same period a year earlier, Tourism Australia data shows.
Chinese and Hong Kong visitors – an attractive target market for Australian casinos – rose around 13% in the year to October 2017. Put another way, a whopping 4 million people from North-East and South-East Asia visited our shores in that period.
The inbound tourism boom partly explains why Australian and New Zealand casinos have been on a multi-billion-dollar development spree that will come to fruition in the next few years.
Crown is leading the charge with a $2-billion hotel, casino and apartment complex at Sydney’s Barangaroo development. Crown last year opened its $568-million, six-star hotel development at Burswood in Perth, in the middle of the city’s expanding entertainment precinct.
Not to be outdone, The Star and its partners are developing an integrated casino resort at the giant Queen’s Wharf development in the Brisbane CBD – a precinct that overall is expected to boost the Queensland economy by $4 billion.
I was bullish on The Star for some time, nominating it as a preferred casino stock in this report in August 2015 at about $5. The Star has a one-year total return of almost 30% and a three-year annualised return of almost 17%. But at the current price ($6) and with the Barangaroo casino opening getting closer, The Star looks fully valued for now.
I have mostly avoided Crown in this report. The stock’s three-year annualised return of 5.3% justified the bearish view. But Crown has rallied about 20% since its November low and with the Perth upgrade complete, the Sydney casino getting closer, the rally should have more legs over the next 12 months.
SkyCity
Dual-listed SkyCity Entertainment Group is about a quarter the size of Crown and has a much lower profile among Australian investors.
SkyCity owns casinos in Auckland, Hamilton and Queenstown in New Zealand, and casinos and hotels in Adelaide and Darwin. About 80% of its underlying earnings come from the NZ casinos.
The NZ-based company has disappointed investors. The three-year annualised total return is 4.8%, according to Morningstar. Over 10 years, the annualised return is 3.8%. In a rising sharemarket, SkyCity has fallen from a 52-week high of $4.36 to $3.70 on ASX.
The company issued subdued guidance in its latest trading update, expecting “modest” growth in underlying earnings (EBITDA) in FY18.
The Auckland casino is performing well, despite construction disruption affecting casino revenue. The Adelaide casino’s performance is down on the previous period partly because of construction work at the venue. The Darwin casino has been affected by rising competition in electronic gaming machines, but appears to be stabilising.
This financial year and next look like a grind for SkyCity with two major construction projects underway. The first is the NZ$700-million investment in the Auckland casino to deliver the New Zealand International Convention Centre (NZICC), which is due for completion in mid-2019.
The second is the NZ$330-million investment in the Adelaide Casino to turn it into a world-class entertainment complex, and capitalise on the city’s broader resurgence as a destination for international tourists. The upgrade is due in late 2020.
Projects of this scale bring project risk and often weigh on the valuations of mid-cap companies. Investors can easily overlook the company as new constructions take years to play out – even though they are potentially transformative to the valuation.
SkyCity might appeal to larger international casino operators who have deep pockets and patience. After years of hard work, SkyCity is 18 months away from finishing the NZICC and accompanying Hobson Street Hotel, and two or so years away from the Adelaide upgrade.
SkyCity should have a lot more momentum and market interest as it gets through FY18 and FY19, but for now the market is focused on the flat earnings outlook.
A predator with a medium-term view might see more value in SkyCity, which has an reasonably open share register and an improving outlook in the next few years.
Chart 1: SkyCity Entertainment Group
Source: ASX
Reef Casino Trust
Like SkyCity, Reef has disappointed investors over 12 months: the total return is -11%. But the owner of the Cairns casino in North Queensland has a solid long-term record with a 5-year annualised return of about 12%.
Reef has fallen from a 52-week high of $3.98 to $3.12 because of a sluggish economy in North Queensland, construction disruption at the casino and a lack of direct flights from China – a problem the company noted last year.
I wrote about Reef for this report in a story on tourism-related stocks in November https://switzersuperreport.com.au/travel-and-tourism-favourites-have-had-their-day-in-the-sun-for-now/ [1] when it traded at $2.80. Reef bounced a little after its December trading update said distributable profit for the second half of FY17 was expected to be 30% better than the same period in FY16 (after sharp comparable falls in the first half).
Ownership machinations are underway at Reef. Casinos Austria AG (CASAG), a majority owner of Reef, announced in August 2017 that it was reviewing its holding.
In mid-December, Reef noted in an ASX announcement that European lotteries operator Sazka Group had entered into conditional share sale agreements to increase its indirect holding in CASAG and wanted to control it. CASAG has a relevant interest in 67.1% of all Reef units.
Should that deal proceed, Sazka would acquire CASAG’s interest in Reef. The Cairns casino is tiny in the scheme of Sazka, which is considering an Initial Public Offering on the London Stock Exchange. It’s too early to speculate on what will happen to CASAG’s stake in Reef, but investors who are comfortable with thinly traded micro-caps should keep an eye on developments.
Having recently visited North Queensland, and spent many years there, I sense the region is finally picking up. It’s no boom, but after years of the mining downturn, parts of the region are stabilising. That should help the Cairns casino’s performance and perhaps is a reason why its second-half result is expected to be up noticeably on the previous corresponding period.
Long term, the Queensland Government sees Cairns as a Global Tourism Hub in the State.
There’s medium-term upside in the Cairns casino as the region’s economy improves and as more domestic and international tourists visit the area. But the market pays relatively little attention to Reef, given the low amount of broker coverage on the stock and thin trading volumes.
Chart 2: Reef Casino Trust
Source: ASX
Takeover update
There have been some good performances from stocks in the Switzer Report takeover list in the past few months. 3P Learning’s recent gains are particularly pleasing, given we persevered with the online education provider. SkyCity Entertainment Group is added.
Source: Morningstar (total return). S&P (ASX 200 return).
*total return assumes dividend reinvestment.
- Tony Featherstone is a former managing editor of BRW, Shares and Personal Investor All prices and analysis at January 10, 2018.
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