Roll-up casino operator Donaco International Ltd (ASX: DNA) last night released a huge increase in earnings results for the full year 2016 (FY16). The results have yet to be audited, but here are the crucial points to be aware of:
- Revenue from operations for the year was up a huge 650% to $143 million
- Net Profit excluding non-recurring items was $54 million, up from a loss in FY15
- A maiden, unfranked dividend of 1cps was declared. At the current share price this yields 2.2%
- The company recorded a VIP win rate of 2.97%, significantly higher than for other ASX-listed casinos
So what?
The results were an impressive jump, thanks largely to the acquisition of the Star Vegas casino, the second addition to the company's portfolio located in Cambodia.
Donaco's results are full of fascinating facets, but three in particular stand out for me:
1. When the house wins, it wins big
In gambling the 'house' always wins, but Donaco's houses are structured to win big.
Donaco has a far higher theoretical win rate than domestic Aussie casinos. Crown Resorts Ltd (ASX: CWN), Star Entertainment Group Ltd (ASX: SGR) and SKYCITY Entertainment Group Limited-Ord (ASX: SKC) all use a theoretical win rate of 1.35% on VIP or 'International business' gaming revenues, while Donaco uses 2.85%.
This is likely driven by the different gaming product mix of Donaco's casinos with a bias towards baccarat which reportedly has a higher theoretical win rate for casinos and accounts for around 88% of casino winnings in nearby Macau.
2. Donaco's acquisition of Star Vegas was a true bargain
After acquiring the Star Vegas business at a fair value of US$328 million, an independent revaluation of the business added an instant US$40 million ($55 million) on paper.
This increase was classified as bargain purchase, which according to accounting rules can be recognised on the income statement for the period.
3. Casino licences worth more than the company's market value
Donaco has recorded the fair value of the Star Vegas casino license it acquired at $400 million on its balance sheet at 30 June 2016, greater than the company's entire market capitalisation of $380 million on Tuesday.
While I couldn't find any notes to suggest how the value was initially calculated, based on an example from the book "Fair Value for Financial Reporting" By Alfred M. King, it's possible that the value is derived in some way from the discounted value of future average customer spend, since if there are no customers, the licence itself isn't of any real value.
Outlook for FY17
Donaco plans to keep its foot on the gas heading into FY17, growing VIP gamblers and expanding junket operations into Thailand. If the company can achieve this while continuing to generate strong cash flows, investors may see the addition of an interim dividend in addition to yesterday's 1 cps final dividend.
