Stocks’ Details

Tabcorp Holdings Limited

Leading Diversified Gambling Entertainment Group: Tabcorp Holdings Limited (ASX: TAH) is engaged in the business of gambling and entertainment services. The company basically operates through three segments- (1) Lotteries and Keno; (2) Wagering and Media; (3) Gaming Services.

The Australian Gambling market is large and has witnessed a CAGR growth of 4.1% over the period of FY12-17.Analysing the Australian gambling expenditure by product segment, EGMs (Electronic Gaming Machine) has seen the highest expenditure of $12.1 billion with a FY12-17 CAGR growth of 2.7%. However, Wagering witnessed the highest CAGR growth of 7.7% over FY12-17.


Australian Gambling Expenditure (Source: Company Reports)

TAH plays an important role to the industry, committed to responsible gambling and a valuable long-term partner to the governments. TAH is the market leader in Australian Wagering segment and holds ~57% market share in terms of revenue.

Financial Performance in 1HFY19: TAH delivered a strong financial result in 1HFY19 on the back of standout performance by Lotteries and the diversification benefits from the combination with Tatts. Statutory NPAT at $182.5 million in 1HFY19 was up from $24.6 million in 1H FY18. Basic EPS (Earnings Per Share) for the period came in at 9.1 cents per share, up from 2.6 cents per share on pcp basis (EPS in 1H FY18 was unfavourably affected by the discontinued Sun Bets operations).

H1FY19-Key Highlights (Source: Company Reports)

Outlook For the Business: The management of TAH remains confident in the long-term growth for the combined business. Focus on profitable growth in revenue market share with strategic investment in advertising & promotion activities, data/CRM, Risk, compliance and responsible gambling etc is expected to be continued. From the combination with Tatts, the management believes that the company is on track to deliver between $130 million and $145 million of synergies and business improvements in FY21.

Stock Recommendation: At current market price of A$4.600 per share, the stock is trading at forward 12 months price to earnings multiple of 22x. The company is the leading financial contributor to the racing industry with substantial contribution towards public funding for governments and communities. In our view, TAH is expected to continue its growth momentum going forward with the combination of Tatts.

Considering the business outlook, fundamentals along with valuations, we give a “Buy” recommendation on the stock at the current market price of $4.600 (down 0.217% on May 13, 2019).

Crown Resorts Limited

Reduced Capital Expenditure as Planned: Crown Resorts Limited (ASX: CWN), is one of the largest entertainment groups in Australia with its core businesses and investments in the integrated resorts sector. The Group has four operating segments- Crown Melbourne, Crown Perth, Crown Aspinalls and Wagering & Online. The company recently, in a release, updated that Wynn has terminated all discussions regarding a potential change of control transaction.  

Financial Performance in 1HFY19: Normalised NPAT attributable to the parent of $194.1 million was up 0.9% whereas Reported NPAT of $174.9 million witnessed a growth of 9.9% before significant items but down 26.7% after significant items (pcp).


Segment Results (Source: Company Reports)

Net operating cash flow for 1H FY19 stood at $382.3 million (as compared to $368.5 million in pcp) and other material cash flow items included net capital expenditure of $209.3 million, dividend payments of $205.9 million and share buy-back payments of $131.4 million.

Total outstanding debt on balance sheet stood at $1091.2 million with interest coverage ratio at 26.6x, substantially higher than the minimum level of >2.5x. Leverage ratio for the group as on 31 December 2018 came in at 0.9x which seems extremely comfortable as compared to the prescribed maximum level of <5.0x.

Ongoing Projects: Crown Sydney Hotel Resort is expected to be completed in the first half of CY21. Total gross project cost is expected at ~$2.2 billion, with a net project cost of ~$1.4 billion. The proposed One Queensbridge project (a 50:50 JV between Crown and the Schiavello Group) remains subject to financing. Crown and the Schiavello Group were granted planning approval in the month of February 2017 for new 388 room luxury six-star hotel and around 700 luxury apartments located on one of the last significant development sites adjacent to Crown Melbourne complex.

Stock Recommendation: At current market price of $13.180 per share, the stock is trading at P/E multiple of 18.330x. Forward 12 Months (F12M)’ Price to Book value for the stock at 1.8x, is lower than F12M Industry median of 2.2x. The EBITDA and net margin at 27.5% and 11.8% in H1FY19 were above the industry median of 13.3% and 4.6%, respectively.

Considering the aforesaid factors, we give a “Buy” recommendation on the stock at the CMP of $13.180 per share (down 0.303% on May 13, 2019).

The Star Entertainment Group Limited

Record Statutory EBITDA Growth at ~66%: The Star Entertainment Group Limited (ASX: SGR) is engaged in the management of integrated resorts with gaming, entertainment and hospitality services and operates The Star Sydney (Sydney), The Star Gold Coast (Gold Coast) and Treasury Brisbane (Brisbane), and manages the Gold Coast Convention and Exhibition Centre on behalf of the Queensland Government. The Group reported record statutory gross revenue of $1,334 million, up 5.0% (pcp) and record statutory EBITDA of $331 million, up 65.9% (pcp), largely backed by a 1.62% (highest over 1H FY2014 to 1H FY2019) high actual win rate and low turn of 9.7 times (lowest over last 5 years, 13.0x average over FY2014-2018) experienced by the International VIP Rebate business.

Operating costs rose 0.3% on pcp, with domestic volume growth (gaming and non-gaming), higher wages and higher interim service levels offset by lower VIP volumes and continuing cost management.


1H FY19 Financial Highlights (Source: Company reports)

What to Expect: The capital expenditure of $477 million in FY18 saw an increase of $57 million largely on the back of construction of The Darling suite tower and the Main Gaming Floor expansion at The Star Gold Coast property, and preparatory works for the Sovereign Resorts expansion at The Star Sydney. The management expects the overall Group capital expenditure to decline from these levels through FY2019-21. The projected capex for FY19 is set at $300-350 million without any change.

Stock Recommendation: Looking at the historical price movement, the stock has given negative return of 19.29% in last 1-year. At current market price of A$4.370, the stock is trading at price to earnings multiple of 14.650x. Forward 12 Months’ P/BV multiple at 1.0x, below 2.2x of F12M P/BV industry median, places the stock in comfortable valuation zone. In 1H FY19, net margins at 12.9% and pre-tax ROA at 3.9% stand higher than 4.4% and 1.1%, respectively of the industry median.

Given the strong fundamentals, comfortable valuation along with the development of projects and capital expenditure on expected lines, we give a “Buy” rating on the stock at CMP of $4.370 per share (up 0.46% on May 13, 2019).
 

National Australia Bank Limited

Managing CET1 Ratio: National Australia Bank Limited (ASX: NAB) provides financial services to over 9 million customers in more than 900 locations across Australia and New Zealand. The bank recently released an update that National Australia Bank Limited and its associated entities became the initial substantial holder with 5.044% voting power in Nine Entertainment Co. Holdings Limited.

Financial Performance in 1H FY19: NII (Net Interest Income) for the group stood at $6,776 million recording a growth of 0.4% on pcp. Net Interest Margin (NIM) at 1.79% saw a downtick of 5 bps in 1HFY19 as compared to the NIM at the end of September 2018 mainly due to ‘Consumer Banking and Wealth’ and ‘Corporate and Institutional Banking’ segments which suffered a NIM compression by 10 bps and 6 bps, respectively.


Net Interest Income (Source: Company Reports)

What to Expect: The management expects to achieve APRA's ‘unquestionably strong’ capital benchmark of 10.5% from 1 January 2020. The Board has reduced interim dividend for 1H FY19 to 83 cents and the DRP discount is 1.5% with no participation limit. With assumption of DRP participation rate at 35%, these initiatives are likely to provide an expected increase in share capital of ~$1.8 billion, which is equivalent to a 45bps hike in NAB’s CET1 ratio.

Stock Recommendation: At current market price of $25.430 per share, the stock is trading at 12.650x. The stock has given a negative return of 9.24% in last 1-year. With Group Common Equity Tier 1 ratio at 10.40, the bank is well placed to exceed APRA’s ‘unquestionably strong’ target of 10.5% by Jan2020. The bank’s quarterly average LCR (Liquidity Coverage Ratio) stood at 130% while its NSFR (Net Stable Funding Ratio) stood at 112% as at 31 March 2019. It can be said that NAB is well capitalized with enough internal liquidity in the system.

Considering the above facts, we give a “Buy” recommendation on the stock at the CMP of $25.430 per share (down 1.966% on May 13, 2019).  
 

Comparative Price Chart (Source: Thomson Reuters)   
 

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