The Victorian Government has announced proposed changes to gaming machines that echoes an infamous day in 2008. Regulatory scrutiny and changes in the gaming industry are a frequent negative event that needs to be understood before investing in this industry.
A range of reforms to the Victorian electronic gaming machine industry have been put forward by the government including: (1) a reduced load-up of $100, down from $1,000 (2) the introduction of pre-commitment and carded play and (3) a reduction in trading hours. Ostensibly the aim of the changes is to retard and reduce the risk of money laundering with the coincidental benefit of lowering gambling harm to individuals. We concur these are valid reasons for making such changes.
For EDV, the changes could impact earnings by -2% to -5% over the next few years as the changes are implemented. It could also permanently ‘cap’ the PE ratio that investors are willing to pay for a company that is arguably the ultimate ‘sin’ stock – it sells alcohol, tobacco and gambling products.
EDV said these ideas have been discussed, negotiated and implemented with other state governments. The blueprint for the changes was probably the various judicial inquiries into casino mismanagement at Crown Resorts and Star Entertainment Group. The Bergin Inquiry in NSW, for example, noted that the introduction of a cashless gaming card would be a “powerful mechanism to assist in combating money laundering”.
We estimate that EDV has roughly 38% of its more than 12,500 EGMs located in (mainly) pubs in Victoria. At a group level, gaming machine revenue represents about 37% of total revenue. Assuming similar changes are made in other states, however, does create a meaningful headwind for gaming customers to which EDV must adjust. For example, NSW recently lowered the machine load-up to $500 from $5,000, applicable only to new machines.
For those investors with a long memory, 10 April 2008 was a tough day for the listed gaming sector as the Victorian Government unilaterally changed the gaming machine licensing rules in the state. That decision immediately wiped almost a third of the market capitalisation from the sector. It was possibly the end of the golden era for gaming companies as the regulatory pendulum swung heavily against an industry that was plundering gamblers while simultaneously heavily bolstering state government coffers.
Investment View
Regulatory changes (including taxes) have become a frequent feature of the gambling industry and are seldom positive for the companies. EDV’s gaming exposure is less overt than other gaming companies but with more than 12,500 EGMs, by far the most of any company in Australia, it is a material aspect of its business. Even within the hotel division, the earnings split between food & beverages, accommodation and gaming is not disclosed by EDV making it hard to see the contribution. But certainly, the earnings from EGMs are significant for EDV, so regulatory changes are material.
EDV’s PE ratio at around 20x FY24f EPS compares to WOW (25x) and COL (21x). The possibility of on-going gaming industry regulatory changes will limit the PE of EDV’s hotel earnings, but not the retail sector earnings. At a group level, therefore, we see a 20x PE as fair for EDV. Consensus forecasts are not substantially different.
Risks to Investment View
EDV operates in liquor, gaming and tobacco all of which attract significant public scrutiny and government taxes. Retail liquor sales may see a fall in sales after a period of elevated sales during the pandemic.
Recommendation
We have retained our Hold recommendation.
