Are these leisure and entertainment companies a buy?

It has been a disappointing year for leisure, entertainment and gaming stocks on the ASX, with Star Entertainment Group Ltd (ASX: SGR), Ardent Leisure Group (ASX: AAD) and Crown Resorts Ltd (ASX: CWN) share prices down 27%, 20%, and 10% respectively. Although, the future may not be so bleak for these companies.

Time to invest?

Star Entertainment Group and Crown Resorts operate some of Australia’s best casinos, restaurants, and resorts, while Ardent Leisure operates major theme parks and attractions such as Dreamworld, WhiteWater World and the SkyPoint Observation Deck on the Gold Coast.

While these are clearly three different businesses, as they are all in the entertainment and leisure industry, they all directly benefit from tourism, which is generating strong tailwinds for these companies.

The Australian market has encountered consistent growth in international tourism over the last decade, welcoming more than 9 million visitors in the year ending August 2018. In fact, the number of tourists flocking to Australia has grown by a whopping 7.7% per annum over the last 6 years.

A range of factors are driving this growth:

  • Successful marketing campaigns by Tourism Australia in key markets such as China and the USA, including the widely popular advert featuring ‘Crocodile Dundee’, which was shown during the Superbowl on US television.
  • The ageing population; as a growing proportion of the world’s population is shifting into higher age brackets, we are seeing more retired individuals – who typically have more disposable income – seeking to enjoy their later years through exploring the world.
  • Heightened competition and the entry of new low-cost carriers in the airline industry have lowered the cost of international travel for consumers.
  • Favourable exchange rates; the value of the Australian dollar has slipped against other major currencies, in particular, the US Dollar, which currently buys $1.36 Australian dollars. This makes it more affordable in US Dollar terms to travel to Australia, relative to historical levels.

Strong growth in inbound tourism is expected to continue going forward, as Australia is forecast to accommodate 15 million annual visitors by 2027. Holding all else constant, this means more visitors to the casinos and resorts owned by Star Entertainment Group and Crown Resorts and more tourists visiting the attractions owned by Ardent Leisure.

Foolish Takeaway

Strong growth in Australian inbound tourism clearly bodes well for the entertainment and leisure sector, however, as an investor it is also important to consider company-specific factors related to Star Entertainment, Ardent Leisure and Crown Resorts.

In particular, it is worth assessing whether the River Rapids Ride tragedy at Dreamworld will have lasting reputational damage for Ardent Leisure, leading to reduced patronage over the long term, or whether the losses in earnings and patronage experienced in FY17 and FY18 will be the full extent of the damage.

It is also worth considering what the long-term outlook of the gaming industry is in Australia and how changing social attitudes towards gambling and the potential for increased regulatory oversight could impact Star Entertainment Group and Crown Resorts.

With all three companies trading near their 52-week lows, they could all be considered to be sitting in the ‘bargain bin’. If you are looking to get exposure to the booming Australian tourism sector, it could be a good time to invest in one of these companies.

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Motley Fool contributor Gregory Burke has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Crown Resorts Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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