Rolling the Dice

Ord Minnett has resumed coverage of the gaming sector, noting that the Australian gaming industry is poised for another year of significant change in 2017. The key industry dynamics, in our view, are as follows: industry consolidation; investment in domestic properties; shifting expenditure growth, with sports-betting up and racing wagering down; gambling expenditure continuing to grow faster than household disposable income; tourism growth being supported by the Asian middle class; and gaming spending allocation being driven by technology due to a consumer preference for mobile.


Our preferred exposures in the sector are Star Entertainment (SGR, Buy) and Aristocrat Leisure (ALL, Buy), with Tabcorp (TAH, Lighten) being our least-preferred option.


Casinos are the largest growth driver for absolute gambling dollars and they continue to be supported by growth in tourism (Chinese visitors in November 2016 were up 10.9% on a year ago), along with property refurbishments. VIP turnover has fallen and is likely to remain volatile, but we are confident refurbishments will continue to underpin overall sector growth. Increasing hotel room capacity supports overnight visitation and gaming growth.


But the wagering and lotteries segments face intensifying competition from corporate bookmakers. Mobile will be the arena to attract customers and defend market share. Digital penetration has increased fixed-odds betting from less than $10 per capita in FY06 to almost $50 per capita, delivering a compound annual growth rate of 16.9%.


Electronic gaming machine manufacturers face structural decline as demographics and preferences shift towards interactive table and digital games.  Slots are losing share of expenditure and manufacturers will continue to seek earnings growth through social, digital, or skills based platforms in diverse geographies.  Despite challenges within the sub-sector, however, Aristocrat is still well-positioned to grow.


Aristocrat Leisure – Americas and digital revenues are recurring and create a strong financial position as increased design and development spend will continue to deliver consistent results. Aristocrat trades at 16% discount to our target price and is a preferred gaming exposure.


Star Entertainment – Stable domestic revenue and investment in key properties while VIP volatility is already incorporated in the share price. Sydney, Gold Coast, and Brisbane investments will drive overnight visitations and gaming expenditure growth. Star trades at 24% discount to our price target, and is a preferred gaming exposure.


Crown – Luxury brand with strong domestic revenues and 11.2% stake in Macau’s recovering mass market. It is focused on domestic refurbishments and Sydney market investment although VIP volatility persists. 


Tabcorp – Wagering yields are under competitive pressure as operating expenses rise to face challenges, including bolstering its digital offering and defending its 50% market share. There is execution risk with potential UBET integration subject to regulatory approvals.  Tabcorp trades at 10% premium to our target price and is our least-preferred gaming exposure.


Tatts Group – A defensive lottery business with digital penetration supporting margins, but wagering risk and yield compression constrain valuation.

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