The share price of casino operator Echo Entertainment (ASX: EGP) closed on Friday at a record low of $2.45 as news of declining revenue in the first four months of FY14 saw investors head for the exits.
Echo reported that revenue between July and the end of October was 3.5% lower than a year earlier, due to a non-existent bounce in consumer sentiment and spending following the election, and a sharp slowdown in VIP gaming activity. CEO John Redmond noted that while revenue had disappointed, earnings had demonstrated some growth, even though costs had risen due to increased levies and charges, an unusual $2 million poker machine payout, and lower yields in some gambling rooms.
More importantly, however, Echo announced that it planned on investing $1.5 billion upgrading its Jupiters Hotel and Casino on the Gold Coast, and build a new Brisbane casino to replace its Treasury Casino. The negative revenue announcement ultimately weighed on investors as the share price dropped nearly 4% on Friday. Echo's shares have now fallen over 28% in 2013 as the company was beaten by Crown Resorts (ASX: CWN) to build a new casino in Sydney, and Crown has made it clear that Queensland casinos are now on its radar.
Following the Sydney disappointment, Mr Redmond said that Echo would now shift its focus to improving its position in the lucrative Queensland market. The company's Jupiters Townsville asset could be put up for sale in preparation for the near-term upgrade of Jupiters Gold Coast. This would fit with the plans of the Queensland government, which is attempting to lure more Asian gambling and tourist dollars to the Gold Coast and Queensland as a whole, with up to three more casino licenses to be issued.
The plan by Echo would see the Jupiters Gold Coast casino get a facelift and an attached six-star hotel, while the existing Treasury Casino in Brisbane would be transformed into a luxury hotel to make way for a new casino in the heart of Brisbane city. The existing Treasury building is heritage-listed, limiting Echo's ability to expand and upgrade the facility.
Foolish takeaway
Echo was battered and bruised during the battle with Crown for the new Sydney casino. There was some speculation earlier this year that Crown would stay out of Brisbane, however its becoming more apparent that Crown will attempt to challenge for any new facilities in Queensland.
The same could be said for competitor Skycity (ASX: SKC), which may be a key player if the mooted three extra casino licenses are issued. Risks remain for Echo and its shareholders, however investment in its Queensland operations is long overdue and the promise of future returns may push the share price up in the short to medium-term, if it is awarded the licenses it desires.
