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How PM Capital analyses a ‘favourite’ stock
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Uday Cheruvu
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The PM CAPITAL Australian Companies Fund, run by portfolio manager Uday Cheruvu , is a benchmark-agnostic concentrated portfolio of between 20 and 30 stocks, which has achieved an annual return of around 11 per cent, since inception nearly 16 years ago.
Uday talks about one of his favourite stocks in the portfolio – Donaco International Ltd – an Australian-listed company with casinos in Vietnam and Cambodia. The company is a beneficiary of a trend favouring those which service the Chinese “VIP gamblers”. Because of the anti-corruption clampdown in China, many big gamblers are now preferring offshore venues other than Macau.
Q: How long have you held the stock?
Since early 2014
Q: What do you like about it?
They own lucrative casino assets on the border of Vietnam and Cambodia. Both assets are highly profitable and ideally located. The Vietnam casino captures high net worth gamblers from China (Hunan Province) whose turnover is not large enough to be classified as VIP customers in Macau but are provided full VIP privileges in the Donaco Casino. With increased scrutiny in Macau, Donaco’s Vietnam casino is likely to capture more traffic from China. The recently acquired Cambodian border casino asset, Star Vegas, has a long track record of profitability and is also increasingly becoming a destination for customers from Thailand and now China. Donaco has spent capex on both the casinos and thus investors will benefit from the improving returns of these assets.
Q: How is it better than its competitors?
Star Vegas is the largest casino in Poipet (on the border of Cambodia and Thailand) and as such has a higher turnover than peers. Owing to its long history of profitability, management has been able to spend capex on the asset and continuously upgrade the hotel. As a result, not only is it larger, it also attracts a bigger share of traffic that its competitors. The Vietnam casino is the only casino in the border region and has exclusivity which means that it has no competitors within its geographic region that can attract cross border Chinese customers in the same way as it does.
Q: What do you like about its management?
The Donaco management team has strong track record and its key executives have previously gained experience with the Genting Group (the CEO of Donaco is the grandson of the founder of the Genting Group) which is regarded as the premier casino operator in South East Asia. Donaco management has further strengthened its team through the acquisition of Star Vegas and the retention of its founder. Management’s interests are well aligned with shareholders as management are the biggest shareholders of the company.
Q: What is your target price on Donaco International Ltd?
We think the stock is worth upwards of $1.00.
Q: At what point would you sell it?
We would think of selling the business if it goes higher than $1.20 in the near term
Q: How much has it added (subtracted) to your overall portfolio over the last 12 months
Over the last 12 months the stock has returned 10 per cent, thus adding to our overall portfolio performance.
Q: Is it a liquid stock?
Liquidity is not high for the stock given nearly 60 per cent of the stock is held by management (or associates).
Q: Where do you see the value?
Currently the market is trading Donaco on a very cheap valuation, which equates to a PE ratio of 7.5x FY16 earnings. As a comparison, Star Entertainment Group (previously Echo Entertainment) is trading on 17x FY16 earnings. We believe the market is not recognising the earnings growth potential in Donaco, particularly the growth arising from the new Chinese junket operator that they have signed on for their Star Vegas property. Star Vegas has spent capex over last 12 months and the new junket operator began operating in September. According to Donaco’s October trading update, the turnover and profitability from the new junket is exceeding expectations already. In addition, we expect Donaco management to announce a dividend over the next 18 months and start paying a regular dividend. We expect this to be another driver for the stock.
*Year to date as at 31 October 2015
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