Echo Entertainment is the second-largest casino operator in Australia, with the Star casino in Sydney the key asset. The casinos are on long term or perpetual leases but there is some regulatory risk. There is also a governance risk with the moves of James Packer to gain more influence. The company’s revenue is less diversified after its demerger with Tabcorp, it is now a pure casino, rather than gambling play. And the casino business, which is very much about high end gamblers, is not faring as well as expected. RBS Morgans has a sell and price target of $3.30:
It is hard to believe Echo has spent A$870m to redevelop The Star without the property experiencing a discernible uplift in non-VIP revenue since opening last September. It makes you wonder whether it is possible to spend your way out of a bad location, particularly at a time when general economic conditions are weak and the property has been in the press for all the wrong reasons of late. The early signs suggest not in this case. The VIP side of the business has a better story to tell although it is risky, which was reason enough for Star to exit the business in the past. That is no longer really an option post the A$160m capital investment in VIP facilities and the fact it offers superior growth potential and a lower tax rate than the rest of the business. But non-VIP revenue at The Star is the key success factor and it offers limited scope for positive surprise, in our view. The writing is on the wall for all to see now.
Deutsche is planted firmly on the fence with a neutral rating. It argues that Packer will probably be outplayed by the Singaporean interests:
Genting Singapore disclosed to Reuters that it holds shares in Echo as part of its investment portfolio, but did not disclose the quantum or when it acquired them. Although Genting Singapore may seek to increase its investment in Echo, it could be a passive portfolio investment (in which the company has a history). Genting Singapore’s declared stakeholding could pressure Crown. The resignation of Echo’s Chairman will likely defuse the public campaign, but we do not expect it to assist in Crown’s quest for a position on Echo’s board.
The stock has little or no forecast dividend yield, RBS isn’t forecasting earnings per share growth until 2013-2014, and the earnings multiple is over 20 times. The capex seems as much defensive as a way to eventually increase profitability. Not exactly a value play.