THE past two years have been disappointing for investors in gaming and resort operator Burswood. The company has reported weak profit results, its share price has fallen and many broking analysts now have a ‘sell’ recommendation on the stock.
THE past two years have been disappointing for investors in gaming and resort operator Burswood.
The company has reported weak profit results, its share price has fallen and many broking analysts now have a ‘sell’ recommendation on the stock.
Paterson Ord Minnett analyst Robert Gee seemed to sum up the mood when he described the latest half-year profit as “one of the worst results at Burswood over the past 15 years”.
It is a surprise, then, that Mr Gee rates the stock a ‘buy’ and expects it to outperform the market in the long term. His positive view would be encouraging for managing director John Schaap, who has been running Burswood during this period of weak earnings.
Mr Schaap certainly has not been resting on his laurels, however.
Investors looking at Burswood today would find it very different to the company Mr Schaap started running in July 2000.
He has overseen the biggest upgrade of the resort’s facilities since it first opened for business.
Costing $96 million, the changes included new conference facilities, a full refurbishment of the five-star Burswood hotel, and upgraded food and bar facilities.
“The investment is starting to bear fruit,” Mr Schaap said.
This view is backed by a Hartleys research report.
“Overall the non-gaming operations were up 30 per cent as Burswood benefited from the recent refit. The hotel and convention centre had a strong half with occupancy and room rates rising,” the report says.
The refurbishment was one of many changes at Burswood.
In February it completed the purchase of its 413-room hotel, which it had previously leased.
It also received a $26.1 million up-front payment from property developer Mirvac Fini to mark the formal completion of their joint venture for a $700 million residential development on land adjacent to the resort.
The 10-year project will eventually house 3,000 people, and Mr Schaap expects this influx of residents to provide a handy boost to patronage of Burswood’s facilities.
The joint venture will also provide a direct boost to Burswood’s earnings, though Mr Schaap acknowledges the profits will not start to flow until the fifth or sixth year of development.
Yet another initiative at Burswood is the planned development of a 300-room three-and-a-half star hotel next to the convention centre.
Burswood has been in long-running discussions with international hotel group Six Continents Hotels and Resorts, which runs 3,200 hotels worldwide.
Mr Schaap continues to describe the negotiations as “close to being finalised”.
He said Six Continents was currently seeking tenders so that it could firm up the price of building the new hotel.
Under the proposed agreement, Six Continents would build and manage room operations at the new hotel, to be named Holiday Inn Burswood.
It would also take over room operations at the existing five-star hotel, to be rebranded Hotel Inter-Continental Burswood.
Mr Schaap expects Six Continents’ globally recognised brands and global reservation system will help to boost hotel earnings.
He said occupancy at the existing hotel was close to 80 per cent, above the levels achieved by competing five-star hotels in Perth.
While there have been many positive changes in Burswood’s non-gaming operations, the reality is that most of its income comes from gaming.
This includes the ‘high roller’ International Commission Business (ICB). Burswood experienced a very low win percentage from ICB in the first three months of the financial year, and has since modified the program.
Mr Gee is cautious about the impact of these changes.
“While logic may suggest that these initiatives will lower volatility in the ICB, past experience shows that this does not always hold true,” Mr Gee said.
DJ Carmichael analyst Justin Stewart is also circumspect.
“While we concede that reduced table differentials would have had some positive impact, we note an element of ‘luck’ where the win rate is above or below the theoretical average,” Mr Stewart said.
On the domestic side, the company was seriously affected by the introduction last December of no-smoking rules on the main gaming floor.
“We took some pain,” Mr Schaap acknowledged.
With the help of new games and smoking balconies, the company is seeing some recovery in patronage.
“We are starting to see some growth come back,” Mr Schaap said.
One of the risks facing Burswood is the possibility that a government review currently under way could force it to extend no-smoking rules to the international gaming room.
Another risk factor is increased competition from the Perth Convention and Exhibition Centre.
Mr Schaap agrees the new centre will make the market more competitive but prefers to focus on the positive.
He expects the PCEC will lead to an overall increase in convention business in Perth.
This could have spin-off benefits for Burswood since 50 per cent of all people who attend conferences in Perth spend some time in the city after their business is over.
Burswood even plans to run a ferry service to the convention centre to maximise these opportunities.
So far as Burswood’s earnings outlook was concerned, Mr Schaap said the company’s objective was still to match last year’s net profit of $20.6 million.
However, broking analysts give the company little chance of achieving that goal.
Euroz Securities industrial analyst Dan Vovil is “a touch more cautious”, having recently revised down his net profit forecast to $17.9 million.
Mr Stewart has also downgraded his view of the stock and forecasts a net profit of $18.3 million.
“We feel that the risks surrounding the immediate earnings outlook are high, given the impact of smoking bans and uncertainty on the international platform,” he said.
“Longer term the outlook is more positive for Burswood, and given a stable win rate on its ICB activities we feel the company is positioned to generate superior levels of profit in 2004-05.”
Mr Stewart is tipping a 2004 profit of $31.6 million while Mr Gee is even more positive, tipping a 2004 profit of $34.0 million.
“The monopoly position in WA provides ample scope for rising earnings,” Mr Gee said.
He also expects the lifting of a 10 per cent cap on individual shareholdings, to take effect in September, will result in “predator attention”.
Two of Perth’s wealthiest investors, Bill Wyllie and Jack Bendat, have acquired substantial shareholdings a-head of this change.
The recent merger of Tabcorp and Jupiters indicates the interest in sector rationalisation, and Crown Casino owner PBL must be considered a possible bidder.
“I don’t think there is any doubt you will see a bid by the end of the year,” Mr Gee said. “I’d be surprised if the stock is not at $1 within six months.”
