Echo profit drops 15.5%

Echo Entertainment Group (ASX: EGP), operator of Sydney’s The Star casino, has announced a drop in normalised profit for the 2013 full financial year, despite an increase in revenues.

Normalised net profit after tax (NPAT), which excludes the impact of ‘significant items’ like write-downs, was down 15.5% for the year to $126.9 million while revenue was up 7.2% to $1.9 billion.

Revenue growth was particularly strong at The Star in Sydney which was up 12.7% after the completion of an expansion project which started in 2007. The Star has been at the forefront of a battle between Echo and James Packer’s Crown (ASX: CWN) this year in an effort to retain its current monopoly casino licence.

Echo failed in its proposal to invest up to $1.4 billion into The Star to turn it into an integrated entertainment resort with hotels, restaurants and a refurbished casino. The casino now only has six years remaining of its exclusivity licence which is set to expire in 2019.

Echo’s reporting can come across as complex and contradictory. The media announcement was keen to highlight that Echo will book a profit of $83.5 million, a 97.9% increase over 2012. But this paints an overly cheerful picture.

Echo’s Queensland casino saw a 3% drop in revenue driven by poorer slot machine performance and less VIP revenue flowing through the doors. The performance will be of concern to shareholders as James Packer’s Crown emerges as a potential threat to Echo’s current sole casino operatorship in Queensland.

Limited guidance was provided on the outlook for the 2014 financial year, but revenue growth of 6.8% for the first seven weeks suggests continued growth is possible. Despite this, with pressure mounting from competitor Crown, Echo will need to take very bold steps to reassure investors in the coming year.

Foolish takeaway

Echo shares have by far been the worst performing of the three big listed casino companies in the last 12 months having plunged 33.6% compared to a 52% rise in Crown shares and a 17% rise for SkyCity Entertainment (ASX: SKC).

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Motley Fool contributor Regan Pearson owns shares in SkyCity.

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