I. Sector landscape and outlook
Casino and gaming industry laid its foundation in 1973 when a first legal casino opened in Tasmania. In the following decades, the casino industry flourished across Australia and casinos opened throughout the country. Casinos include not only gaming services but also restaurants, entertainment and hotel accommodation. Industry players have evolved as a gaming venue provider mirroring international trends seen in places like Macau and Las Vegas.
How has the industry stacked-up?
Australian Gambling Statistics, 35th Edition by Queensland Government Statistician's Office indicate that total gambling turnover in 2017-18 was $218.82 billion, an increase of 4.9% over the previous year. Notably, total sports betting turnover increased by 14.9% over the previous year, and total racing revenue increased by 8.1% over the previous year.
Figure 1: Gambling Turnover Breakup
Source: Australian Gambling Statistics, 35th Edition
Gaming dominates the gambling with around 83% or $181.4 billion, followed by racing with a share of ~12% or $25.8 billion, and approximately 5% share with sports betting, equating to $11.61 billion.
Figure 2: Gaming Turnover Breakup
Source: Australian Gambling Statistics, 35th Edition (Others include minor gaming, pools, interactive gaming, lotteries and instant lottery)
Within gaming turnover, the majority of turnover was derived from gaming machines with a share of ~82% or $149.53 billion, followed by casino with a share of around of 14% or $25.23 billion. Lotto turnover share was 2.52% or $4.57 billion, Keno share was 0.73% at $1.32 billion.
Now let us have a look at the gaming machine industry.
Gaming machine industry
A vibrant gaming industry needs to be supported by a strong gaming machinery industry. In Western Australia, electronic gaming machines are only permitted in casinos. In all other states, electronic gaming machines are present in clubs, taverns, pubs, and casinos.
In August 2018, the Centre for International Economics (CIE) published a report on the Australian gaming machine industry. It estimated that value-added by the gaming machine industry was $8.3 billion in 2016-17, derived from manufacturing, maintenance, and use of machines by the customers.
CIE estimated tax revenues to Governments were $5.5 billion, of which the majority were generated from state-based gaming machine taxation. When it comes to export, the industry is engaged in services exports to international travellers at venues and machinery exports to other nations.
During the year, it was estimated that manufacturing exports were $199 million – three companies had almost 75% share. And services exports to international travellers stood at $85 million.
With the understanding of the gaming machine industry in place, let us now look at what drives the casino and gaming industry.
What drives the casino and gaming industry?
Figure 3: Industry growth drivers
Source: Kalkine Secondary Research
Infrastructure: Infrastructure constitutes not only gaming machines and venues but also high growth segment in the gambling industry like tech-based sports betting, which is further enabled by a range of sports. In sports betting, businesses have transformed from web-based services to app-based services.
As far as gaming machines are concerned, Australia has a lot of them, except Western Australia because of restrictions. According to CIE report, NSW leads with having one machine for around 62 people, followed by ACT at 70 people/machine, QLD at 77 people/machine, NT at 85 people/machine.
Disposable Income: Income of the customers continues to play an important role in the industry fundamentals. Per capita income and human development index of the nation are also similar factors that drive the industry.
As an advanced economy, the income factor remains favourable for the businesses in the country, but the near-term picture of the economy has deteriorated, owing to COVID 19 crisis. Meanwhile, Australia has done relatively well when it comes to minimising the spread of infections and re-opening the economy; these factors also support the near-term outlook for the industry.
Tourism: Whether its Mount Kosciuszko, Bondi Beach in Sydney or terrains of Northern Territory – the country has almost everything to offer. When the mainstream world goes through winter, Australia has warm beaches to offer, and it remains well-positioned to capture the attraction to its surreal nature.
Places like amusement parks, casinos and gaming venues would continue to attract the tourists. But the tourism outlook remains uncertain due to international travel restrictions and the cautious stance of policymakers across the world.
COVID-19 crisis has single handily deteriorated all these fundamentals at once. Despite having among the best infrastructure in the world, the casino and gaming industry was directly impacted by the lockdown measures, which also led to a freeze in the sports industry.
Government Regulations
Casinos, gaming, gambling, betting, poker, bingo, lotteries etc. (collectively activities, services) are regulated by a number of bodies in the country. In addition to Federal Laws, there are a large number of laws formulated by the states to regulate such activities in their jurisdiction.
The Australian Communications and Media Authority (ACMA) regulates gaming in Australia. Interactive Gambling Act 2001 prohibits online casino gaming in Australia. Each state has a different body to regulate these activities. Further, these services also fall under regulations enacted in AML/CTF, anti-trust or consumer protection laws.
Licenses are required by the laws to conduct these activities. It usually takes up to a year or longer, and the process is quite extensive. License availability is usually limited and depends on state laws. Online gambling is also having strong growth in the country, and offshore operators without a license are prohibited from operating under the laws.
Let us now shift our focus towards the risks that this industry is exposed to.
Casino and Gaming Industry Risks
Figure 5: Risks
Source: Kalkine Secondary Research
Having gone through the risks, now let us see how the industry has been coping through the COVID-19 crisis.
Industry Navigating through the crisis
The industry has been impacted by COVID 19, and businesses are focusing on managing the crisis by pursuing their strategies and maintaining sufficient liquidity. Gaming machine players have seen their revenue collapse as venues were shut down and capital expenditure deferrals by venue operators.
Managing liquidity has been a key challenge for businesses. Companies stood down employees, reduced working hours, optimised operating costs, and deferred non-essential capital expenditure.
For businesses that were severely impacted by the COVID 19 crisis, policymakers introduced wage support programmes in many countries. In addition, businesses have been refinancing and capitalising on lower interest rates.
Since the economy is re-opening, businesses are welcoming customers again with renewed controls related to safety, hygiene and social distancing. As sports have come back online, companies with online sports betting are also operating again.
II. Investment theme and stocks under discussion (CWN, SGR, JIN and ALL)
After understanding the sector, let us now look at four companies listed on the ASX. The price potential of the companies under discussion has been analysed based on ‘Discounted Cash Flow’ methods.
1. ASX: CWN (CROWN RESORTS LIMITED)
(Recommendation: Buy, Potential Upside: Low Double Digit, Mcap: A$ 6.20 Billion)
Crown Resorts Limited is an international casino and gaming entity with its underlying businesses and investments in the unified resorts sector.
Valuation
Our illustrative valuation model suggests that stock has a potential upside of ~19% on 8 July 2020 closing price.
2. ASX: SGR (THE STAR ENTERTAINMENT GROUP LIMITED)
(Recommendation: Buy, Potential Upside: Low Double Digit, Mcap: A$ 2.73 Billion)
The Star Entertainment Group Limited is engaged in the supervision of integrated resorts with entertainment, gaming & hospitality services.
Valuation
Our illustrative valuation model suggests that stock has a potential upside of ~20% on 8 July 2020 closing price.
3. ASX: JIN (JUMBO INTERACTIVE LIMITED)
(Recommendation: Speculative Buy, Potential Upside: Low Double Digit, Mcap: A$ 764.07 Million)
Jumbo Interactive Limited is a digital retailer of both national jackpot lotteries and charity lotteries.
Valuation
Our illustrative valuation model suggests that stock has a potential upside of ~22% on 8 July 2020 closing price.
4. ASX: ALL (ARISTOCRAT LEISURE LIMITED)
(Recommendation: Watch, Potential Upside: Mid-Single Digit, Mcap: A$ 16.6 Billion)
Aristocrat Leisure Limited is involved in designing, developing, manufacturing, & marketing electronic gaming machines, casino management systems and digital social games.
Valuation
Our illustrative valuation model suggests that stock has a potential upside of ~7% on 8 July 2020 closing price.
Note: All the recommendations and the calculations are based on the closing price of 8 July 2020. The financial information has been retrieved from the respective company’s website and Refinitiv (Thomson Reuters). Recommendations are valid at 9 July 2020 prices as well.
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