Analysts back The Star over James Packer’s Crown Resorts

The Star will beat out James Packer-backed Crown Resorts in the fight to attract VIP players, says JPMorgan.

The Star CEO Matt Bekier is tipped to be a big winner as VIPs flock to his casinos. Picture: Hollie Adams

Australia’s gaming industry is set for some wins and losses this year, with The Star tipped to win in VIP over the James Packer-backed Crown Resorts and wagering giant Tabcorp set to suffer competitive headwinds.

JPMorgan analyst Donald Carducci, in a wide ranging report on the investment bank’s outlook for the Australian gaming industry, said key themes in 2019 included uncertainty around the health of consumer spending impacting casinos.

He also outlined that resilient corporate bookmaker pressure remained a headwind for Tabcorp (TAH), naming the Australian-listed company as its least favoured pick among gaming stocks.

Casino company The Star Entertainment Group (SGR) was flagged as a company to watch, despite the fact that its share price had declined around 28 per cent since January last year.

“We are confident The Star offers an attractive risk reward as earnings growth is achievable through domestic property growth and additional room capacity,” Mr Carducci said in the report to clients.

The Star’s flagship casino is in Sydney and Mr Carducci highlighted that the harbour city’s competitive environment would be “front of stage” when rival Crown opened its Barangaroo resort.

The gaming analyst noted that the opening of Crown’s Sydney casino, scheduled for 2021, would make its Melbourne property less attractive.

“Crown’s Barangaroo makes Sydney the first port of call for VIP’s in 2021,” Mr Carducci said.

He added that he believed The Star remained the better performing Australian casino in VIP play. Mr Carducci also pointed out that The Star was well-positioned to attract overseas tourism.

“Australia remains a popular tourist destination with total visitor growth showing modest trends in recent years. Foreign tourists are a key income source for casinos,” he said.

“Chinese tourists are the highest paying segments of foreign visitors. Casinos offer block rooms to draw in Asian tour groups.”

The analyst said that international tourism and expenditure on travel and experiences was increasingly popular without signs of abatement, which he said was a key positive for The Star’s leverage to Sydney and the Gold Coast.

JPMorgan’s report noted that Australian gambling expenditure had grown steadily with a 2.9 per cent compound annual growth rate over the past 16 years. Australia continues to remain one of the most penetrated and developed gambling markets in the world.

Gambling expenditure is strongly correlated with household disposable income (HDI) growth and trends around that data show a shift in product expenditure.

Mr Carducci said that product expenditure as a proportion of HDI had seen a marked shift with racing now contributing half of what it did 26 years ago. Spending on pokie machines continued to make up the vast majority.

“There has been a structural shift in gambling product preferences over the last 20 years with casinos and sports betting now contributing more towards total gambling expenditure at the expense of EGMs (pokies) and racing,” he said.

“This preference shift has been driven by demographic and macroeconomic changes.”

The investment bank’s report noted that its analysts continued to believe that sports betting was driving the recent resurgence in HDI wallet share of gambling.

“Sports betting expenditure continues to grow strong as the correlation with HDI rises, while on a per capita basis, the trend of racing, lotteries and EGM expenditures seem to no longer be supported by HDI growth,” Mr Carducci said.

When looking across Australia’s gaming sector, he said that Tabcorp was the investment bank’s least preferred stock due to competitive wagering pressures, margin compression and tote and retail declines. But Mr Carducci added that Tabcorp’s lotteries business — obtained through its takeover of Tatts Group — remained attractive.

“The lotteries business is the key earnings driver and will drive headline growth in fiscal 2019,” he said.

“But the wagering business will continue to face headwinds from corporate bookmakers, even as consolidation (with Tatts Group) and synergies begin to benefit the business.

“Regulatory changes such as the point of consumption tax may slow the rapid share gains of corporate bookmakers however integration risks from the (Tatts) merger remains a likely distraction.”