Time to buy DNA!, page-125

Baillieu Holst

1H17 result: Normalised NPAT (excluding non-recurring items) of A$19.1m (-25% pcp) with normalised revenue of A$59.4m (-15% pcp) and EBITDA of A$33.7 (-16% pcp).

Key takeaways: 1) a relatively weak result was expected and delivered due to strengthening of A$ versus local currencies and reduced visitation to Star Vegas by Thai gamblers after the passing of the King of Thailand; 2) DNA cited recent improvement at Star Vegas in 2H17 with 8.4% pcp increase in rolling turnover in January 2017; 3) strategies to change Aristo’s focus to mass market and reduce win rate volatility appear to be working; 4) 1H17 exhibited very good cost control with the result highlighting high margin nature of operations – 1H17 EBITDA margin of 57% in normalised A$ terms; 5) cash generative nature of operations continues with US$15m in debt repaid in 1H17 and a further A$17.5m repaid in January 2017; and 6) whilst 1H17 profitability at Star Vegas was soft, the overall FY17 result is protected by a vendor guarantee who must make up the shortfall if the property doesn’t attain EBITDA of US$60m – this scenario would also result in DNA not paying the final earn-out, of which the first instalment in FY16 was A$21m.

Outlook: 1) no specific numerical guidance for FY17; 2) DNA expecting usual bias to 2H due to major public holidays in Thailand and China; 3) DNA noting improved visitation in recent weeks at Star Vegas; 4) continued focus at Aristo to attract mass market players; 5) final dividend expected to be declared; and 6) online gaming at Star Vegas scheduled to launch in 4Q17.

Changes to forecasts: We have reduced FY17 and FY18 forecasts by 12% and 9% respectively after considering a weaker 1H17 result than expected, reduced financial footings at Aristo due to lower VIP turnover and updating FX assumptions.

Investment view: BUY retained with High risk rating, revised DCF valuation of A$0.75 (prev. A$0.87) and price target of A$0.75 (prev. A$0.85). Whilst FY17 has started slowly, the decision to focus on less volatile mass and mid-market business has resulted in the desired reduction in risk. The balance sheet is also rapidly improving. It remains hard to identify the catalyst which will re-rate this story. Nonetheless, we retain our BUY call based upon: 1) valuation; 2) the unique high margin status of both properties; 3) the growth available in cross-border gaming in Asia, combined with low tax regimes; and 4) strong cash flows which is now allowing simultaneous debt repayment and dividend payments.

Full report link is below:
https://www.baillieuholst.com.au/publishedresearch/2017/DNA_26feb17.pdf