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Echo Entertainment Group Ltd – getting ready for big changes

Echo Entertainment Group Ltd (ASX: EGP) has announced that it’s selling the Jupiter’s Townsville casino for $70 million. The privately-owned hotel operator, Colonial Leisure Group, will be adding it to its 15 hotels in WA and VIC, as well as a brewery and other assets.

Echo expects a pre-tax profit of about $8 million after transaction costs, and the purchase price works out to be about 10 times actual FY2013 EBITDA, including corporate cost allocations.

The company, operator of Star City casino, can use the funds to build up reserves in preparation to bid for the proposed integrated resort project that the QLD government wants built along the Brisbane River, where government buildings currently stand.

Among rivals for the project are Crown Resorts Limited (ASX: CWN) and other international casino developers. The state government is considering creating three new casino licenses, and wants to see world-class venue development to drive tourism and CBD business.

Recent developments

The company has been increasing its high-roller guest numbers with VIP “front money” up 35% in 2013. Its overall share of the VIP business in Australia and New Zealand is up to 34%, where it was only 20% in 2010.

It sees more development opportunity in QLD, since it is currently the biggest operator there, with venues like the Treasury Casino in Brisbane and Conrad Jupiters on the Gold Coast. It has no competition in those areas, but the possibility of new casinos will definitely affect its position.

Financials

NPAT before abnormals has been trailing down since it listed in 2011, although operating revenue has increased. In 2013, NPAT was $112.7 million with net profit margin at 6.48% and ROE at 3.94%.

Analyst forecast consensus is projecting a median rise in EPS, from its current 13.6 cents per share to about 19.9 cps for 2015.

Foolish takeaway

The company does have a lot of work ahead with major renovations planned for the Gold Coast casino, including creating a 6-star hotel. If it’s successful in winning the proposed Brisbane casino, costs are projected to be over $1 billion. It will deem that worthwhile to keep its primacy in the QLD market.

Potential competition may change the landscape of business for it, but other cities have more than one casino, so it is not uncommon. It’s just better to have no competition at all.

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Motley Fool contributor Darryl Daté-Shappard does not own shares in any company mentioned. 

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