Are casinos worth a punt?

Jeffrey Hutton is a Morningstar contributor.

Changes to gaming regulations, a downturn in consumer spending, and a shake-up in the competitive landscape with the approved demerger of Tabcorp Holdings (TAH) is likely to shorten the odds on casino operators, investors and analysts say.

Casino operators such as Crown (CWN) and the upcoming Echo Entertainment, which will be spun off from Tabcorp by the end of the month, will likely have the financial heft, allure for high-rolling gamblers, and the political clout to either dodge or water down potential mandatory gambling limits proposed for poker machines.

"There's a huge amount of uncertainty in this sector," says Morningstar analyst Ross MacMillan.

"Casinos will likely get an exemption from any limits on poker machines in order to hold on to tourist numbers and foreign high-rollers."

It's that sort of outlook, plus the prospect of increasing numbers of affluent Chinese tourists and overall savvy management that the casino industry attracts, which prompted the likes of Perpetual to become increasingly bullish on the sector despite the uncertainty.

Last month Perpetual raised its stake in Crown, which along with its Australian casinos owns a 33 per cent stake in a Macau casino joint venture, snapping up almost 8 million shares and taking its stake to 8.25 per cent from 7.22 per cent. Perpetual owns roughly 8 per cent of Tabcorp, too.

"Regulations around poker machines is intensifying," says Perpetual portfolio manager Charlie Lanchester.

"Casinos in the medium term will probably benefit. Casinos are better able to manage the change. It's the small clubs that will suffer because the issue is around the cost of implementation."

Implementation, should the proposals get that far, is likely to be expensive. The cost of installing software and other adjustments that limit gamblers to a nominated limit is likely to be anywhere between $400 million and $5 billion, Deutsche Bank analyst Mark Wilson says.

Gaming revenue will slump by 30 per cent, denting earnings per share in the sector anywhere from 5 per cent to 36 per cent, Wilson says.

The change in regulation comes as households skimp on entertainment and inbound tourism slumps, MacMillan points out.

"Household expenditure is being squeezed as consumers repay debt. Spending on gambling may fall as a result until people feel more confident."

Lanchester, though, reckons casinos are, up to a point, immune to the ebbs and flows of consumer spending. For domestic clientele, a play at the pokies is almost considered a small indulgence. The nouveau riche of China are even less put off by exchange rates or the cost of living.

"A slump in consumer sentiment doesn't help but these stocks are defensive," Lanchester says.

Deep pockets don't hurt either when it comes to renovations and hiring the right help. Echo Entertainment, which will comprise Tabcorp's casino business, is spending $960 million on a complete makeover of its Sydney Star City casino. The company will spend $625 million to spruce up Queensland casinos. Tabcorp is aiming to implement the demerger on 1 July.