LEISURE LETTER (03/31/2015)



SJM - SJM CEO Ambrose So Shu Fai described the government’s latest estimated average monthly gaming gross receipts of 20 billion patacas for this year as “a bit conservative”.  However, he was quick to add he believed that the government was just being cautious.



Thomas Cook Group trading update

  • The UK business continues to trade ahead of last year, with significant bookings growth resulting from robust demand particularly for our Winter Sun holidays 
  • Trading in Continental Europe and Northern Europe, while still tough compared to last year's strong performance, has improved since we reported FQ1 results
  • Demand for holidays to our Concept Hotels is growing, with bookings up by 20% versus prior year
  • Summer 2015 trading is developing satisfactorily, with improving trends seen across most markets since our last update. The season is now 54% sold for the Group as a whole, 2% higher than this time last year.


Takeaway: For the summer season, stronger bookings are seen for this tour operator but pricing is still flattish which we expect is also the case for the cruise lines in Europe. 


SGMS - has signed a contract to provide OPAP S.A.("OPAP") with 5,000 video lottery terminals ("VLTs") pursuant to OPAP's10-year license to operate a network of 16,500 VLTs across the country.  Deployment is expected to begin in spring 2015 and conclude by the end of the year.

Takeaway:  30% share is roughly in-line with expectations. Greece has been a long-delayed project. Will it finally get off the ground this year?


HELLENIC LOTTERY (OPAP)/SGMS - scratch ticket revenues for the Hellenic Lottery grew 13% QoQ in Q4 2014 to 100m euros while other lottery revenues declined 5% QoQ in Q4 2014.  Total Hellenic lottery revenues grew 7% QoQ to 141m euros. OPAP says "The H2 revenues’ run rate is seen as a normalized trend to be expected in the foreseeable future as well."

Takeaway:  Hellenic Lottery seems to be growing modestly. SGMS (16.5% equity interest in Hellenic Lottery) recorded income of $2.3 million in FY 2014.  SGMS also recognized revenue of $6.3 million from the sale of instant games to Hellenic Lotteries during FY 2014. Operations under the Hellenic Lottery concession agreement commenced in May 2014.


PENN - has informed the partners of Endeka Entertainment LP (“Endeka”) of its intent to withdraw from the proposed Lawrence Downs Casino and Racing Resort project. An application by Endeka for the proposed $225 million integrated racing and gaming facility in Lawrence County, Pennsylvania has been pending before the Pennsylvania Gaming Control Board (PGCB) since May 2013.


“We are disappointed to be withdrawing from this project,” stated BJ Fair, Chief Development Officer for Penn National Gaming. “However, given the continued softness in the economy and the level of market saturation -- not just in Western Pennsylvania, but across the Commonwealth -- we are regrettably unable to justify this investment at the statutorily required spending levels,” said Fair.

Takeaway: Rifts between PENN and Endeka caused the withdrawal.  In addition, in the trailing 12 months, total casino revenues in Pennsylvania have been flat, which suggests a mature market. 


ERI -  will ask state regulators for permission to remove 140 slots as part of a $5 million improvement plan that ERI says will right-size its operations. The reduction will leave Presque Isle with 1,580 slots. ERI also wants to reduce its number of table games from 46 to 42.

Takeaway: Pressure from Cleveland openings.


Macau casino tax budget - The amending budget proposal, which will be voted upon at the Legislative Assembly on Wednesday, includes a 30 percent cut in revenues derived from gambling taxes. According to the proposal, the government expects to cash in MOP84 billion derived from the casino tax revenue. In the budget announced in November 2014, revenue was estimated to be around MOP115 billion. 



Hotel transactions to ebb - hotel investors at the Hunter Hotel Conference said volume levels will be lower than what was seen in 2014.  Sujan S. Patel, managing director at NorthStar Realty Finance Corporation, said his company’s focus will be on smaller-sized deals of $50 million or higher. “There’s a limited arena of big deals,” he said. “This is probably the year of smaller-scale transactions. Clearly, there are groups of people who have built large hotels and some groups might decide to sell them. From NorthStar's perspective, we are certainly not a seller this year. We will be acquiring.”


Select service is a particularly sought-after class of hotels. Tyler Morse, CEO of MCR Development, said consumers favor select service because of the lower cost of their stay.  “It’s a great value proposition,” he said. “There’s been a secular shift with consumers from full service to limited service.”


An attractive debt environment will continue to help spur deals during 2015. While it is a good time to buy assets, the panelists agreed it is an equally if not more favorable time to sell. 






Hedgeye Macro Team remains negative Europe, their bottom-up, qualitative analysis (Growth/Inflation/Policy framework) indicates that the Eurozone is setting up to enter the ugly Quad4 in Q4 (equating to growth decelerates and inflation decelerates) = Europe Slowing.

Takeaway:  European pricing has been a tailwind for CCL and RCL but a negative pivot here looks increasingly likely in 2015.

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