The gaming and entertainment sector has been on fire in our biggest cities, fueled by inbound tourism and fanned by robust local spending. It's an attractive sector for investors looking for growth and reasonable dividend yields.
No two companies are the same, but let's consider four of the biggest ASX listed gaming companies: Crown Resorts Ltd (ASX: CWN), Star Entertainment Group Ltd (ASX: SGR), SKYCITY Entertainment Group Limited-Ord (ASX: SKC) and Donaco International Ltd (ASX: DNA).
Comparing for value
To cut through the tangle of different capital structures and depreciation expenses we'll avoid using price-to-earnings ratios. Instead we'll use Enterprise Value (Market capitalisation plus net debt) relative to Earnings Before Interest, Tax, Depreciation and Amortisation (EBITDA).
The EV/EBITDA measure focuses on the adjusted value of the company compared to what it earns from its operations and by this measure SKYCITY Entertainment looks the best value, followed by Crown Resorts.
Company | EV ($ millions) | EBITDA (ttm) | EV/EBITDA |
SKYCITY Entertainment Group Limited | 3,383 | 335 | 10 |
Crown Resorts Ltd | 11,556 | 895 | 13 |
Star Entertainment Group Ltd | 5,504 | 404 | 14 |
Donaco International Ltd | 530 | 37 | 14 |
Source: Company reports. Calculations by author.
Growth ahead?
SkyCity has had a relatively low growth rate in the last five years, but the key question is if the EV/EBITDA ratio fairly reflects the company's prospects going forward.
Both Crown Resorts and Star Entertainment have huge growth projects ahead which explain their higher valuations. Crown is building a "six-star" hotel resort in Sydney and developing a site in Las Vegas, while Star is part of a joint venture building a new resort on Brisbane's Queens Wharf and expanding its Jupiters Hotel and Casino on the Gold Coast.
SkyCity has its own aggressive growth plans relative to its size, expanding its Adelaide Casino and building the New Zealand International Convention Centre (NZICC) in Auckland in exchange for an extension to its gaming licence and increased gambling facilities which can be expected to drive higher returns.
The markets SkyCity operates in are smaller, but it holds monopoly positions in central locations which draw customers.
The best value option
In my view SkyCity looks to offer the most compelling value today, particularly for conservative investors. It likely has a lower growth profile than Crown Resorts and Star Entertainment, but this is made up for by the great valuation, lower risk projects and monopoly market position. This will support the company's history of steadily increasing earnings and solid dividend.