Chips are down for gambling industry, by Sara Rich - The Australian - 1st November 2008

The spring horse-racing carnival, headlined by the Victoria Derby today and the Melbourne Cup on Tuesday, is a time of excitement and frivolity.

But for the people at the top of Australia's gambling industry, a dark cloud hangs over the celebrations.

The global financial crisis, which has seen everything from stock markets to household balance sheets plummet, is being felt by the biggest gaming providers in Australia and around the world as consumers cut back on discretionary spending.

Gambling's mecca, Las Vegas, has endured monthly declines in revenue for most of this year as struggling businesses tighten balance sheets by cancelling expensive conferences, while resorts struggle to fill their previously overbooked rooms.

Las Vegas casino developer MGM Mirage last week posted a 67 per cent drop in third-quarter net income, with revenue falling by 7 per cent to $1.95 billion.

The company cited a "stay-at-home mentality" among consumers as having a strong effect on earnings during September.

Meanwhile, new Chinese visa laws that limit travel to Macau, the world's newest gambling playground, have stunted revenue growth at the city's casinos.

The effect of this is being felt close to home as well, as James Packer's gaming group, Crown, operates a casino there and is in the process of building a second one.

The Australian company has lost $6 billion in value since late last year as its share price continues to fall.

The value of its stock has steadily decreased from $14.27 since the company was split from Mr Packer's media investment group Consolidated Media last December, closing yesterday at $6.70.

But while Crown contends that its Australian operations continue to deliver solid results, with revenue from table games and gaming machines growing rather than reversing, other local players have not been as fortunate.

The world's second-largest maker of poker machines, Sydney-based Aristocrat Leisure, was forced to explain to shareholders and analysts last week why it was downgrading its profit forecast by as much as $80million -- an announcement that led to 28 per cent being slashed from the company's share price as risk-adverse investors dumped the troubled stock.

The company's chairman, David Simpson, blamed challenging economic conditions that had dampened enthusiasm for its latest product offering in Japan.

According to Mr Simpson, gaming operators just aren't spending like they used to.

Major betting outlet Tabcorp, the name behind Keno and TAB Sportsbet and the manager of casinos Star City and Jupiters, is also struggling under the worst economic downturn in years.

At the company's recent annual general meeting, chairman John Story revealed casino revenues were flat.

But it is not just the deterioration in global financial markets -- which made it "inappropriate" for Tabcorp to provide a forecast on future dividends -- that is affecting the company's bottom line; government legislation is also proving to be a minefield.

Tabcorp and rival gaming provider Tatts Group were hit with a bombshell in April when the Victorian Government announced changes to the state's gambling industry structure, which would effectively terminate their licences in 2012.

Meanwhile, the internet is flooding the market with new competitors who are not required to hold wagering licences in NSW and Victoria. On top of that, relatively relaxed tax laws for bookies in the Northern Territory are threatening the revenue prospects of other states.

With the added pressures of full indoor smoking bans in Victoria and NSW and the disruption to horse-racing as a result of equine influenza, it seems the global financial crisis could not have come at a worse time.

Greg Fraser, senior industrial analyst at Shaw Stockbroking, said consumers were spending less on just about everything -- and gambling was no exception.

"The gaming industry is reasonably closely correlated to household disposable income and when that declines so does gambling expenditure," he said.

"Consumer confidence is declining as people feel less secure about their jobs. That points to lower turnover in the gambling industry as well."

The Reserve Bank of Australia has predicted household income growth to wane over the next two years, citing the effects of global financial crisis.

Over the past five years, the amount of money Australian households had left over to spend, after paying taxes and interest, grew by 6.1 per cent per year -- the fastest rate in more than 30 years.

"I think it is now widely accepted that growth in real incomes over the next year or two will be more subdued than over the past five years," Reserve Bank deputy governor Ric Battellino said last week while addressing a bankruptcy conference. "How subdued will depend importantly on the effects of the financial turmoil."

Ironically, casinos are a major contributor to economic growth in Australia -- in 2005-06 they contributed a combined $7.5 billion in GDP and provided $2.5 billion in salaries and wages.

State governments are also heavily reliant on the income derived from the industry, with casinos contributing 26 per cent of all revenue to government taxes during the same period.

Historical analysis does provide a glimmer of hope though, with the industry having not posted any negative revenue growth in the last 30 years.

"If history is anything to go by the sector is fairly defensive," UBS gaming, paper and packaging analyst Sam Theodore said.

However, Mr Theodore contends that the industry is now a lot more mature than it was in the previous three economic cycles, when demand for slot machines and new products was surging.

"Is history going to be repeated? That's the question and no one knows the answer," he said.

"It is still in the consumer discretionary space so if there is pressure on the consumer, gaming feels it like other industries -- but I think there is a relative defensiveness there."

(Credit: The Australian)

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