Share price of Iao Kun Group Holding Company (IKGH) has plunged 7% since the company posted third quarter 2014 results on Dec 1. The company posted a loss for the second consecutive quarter and lowered its expectation for 2014 Rolling Chip turnover. Meanwhile, on Dec 3, 2014, the company announced its Rolling Chip turnover for the month of November, which declined 30% year over year leading to a further downward movement in shares.
Third Quarter 2014 Results
Iao Kun Group Holding posted a loss of 2 cents per share in the third quarter that compared unfavorably with the year-ago earnings of 16 cents. The significant downside reflects lower revenues and higher expenses. However, it was narrower than the Zacks Consensus Estimate of a loss of 5 cents per share.
Net revenue of $52.0 million declined 15% year over year and missed the Zacks Consensus Estimate of $57.0 million by 8.8%. The downside reflects a decline in win rate, slower revenue growth of VIP baccarat and an economic downturn and tightening of credit in mainland China, where the majority of Iao Kun Group’s VIP gaming patrons reside.
Iao Kun Group is engaged in the promotion of five major luxury VIP gaming facilities in Macau, the largest market for gambling in the world. This exposes it to the sluggish economic conditions in the region. VIP gamblers in Macau are curtailing spending due to a cooling Chinese economy. Also, the slowdown can be attributed to a nationwide crackdown on corruption in China that has compelled Macau officials to impose restrictions on VIP gamblers to stop billions of dollars from being siphoned off illegally from mainland China to Macau.
Behind the Headline Numbers
Rolling Chip turnover for the reported quarter was $4.3 billion, up 5%. However, win rate declined 65 basis points (bps) on a year-over-year basis to 2.53%. Iao Kun Group’s Rolling Chip turnover was $14.84 billion for the first 10 months of 2014, up 5% on a year over year basis.
Also, selling, general and administrative expenses were $5.5 million, up 7.5% year over year owing to higher costs related to additional VIP gaming rooms as well Iao Kun Group’s application to get listed on the Hong Kong Stock Exchange.
In Jun 2014, the company had submitted a listing application form (Form A1) to the Hong Kong Stock Exchange to apply for the listing of, and permission to deal in, the shares on the Main Board of the Hong Kong Stock Exchange by way of introduction. In Jul 2014, the Hong Kong Stock Exchange completed an initial three-day review of the Form A1 application and accepted it for detailed inspection.
Guidance for 2014
The company lowered its guidance for Rolling Chip turnover for its five existing VIP rooms in Macau. The company now expects it in the range of $16.8 billion to $17.5 billion for 2014 compared with the previous guidance of $17.0 billion to $19.0 billion.
Our Take
A slowdown in gambling in Macau since May 2014 has dampened the company’s results. Given the current scenario, we expect the company to continue to experience pressure due to China’s crackdown on illegal money transfers, credit growth concerns, tighter restrictions on visas, protests in Hong Kong and the smoking ban in casinos. Iao Kun Group Holding presently has a Zacks Rank #5 (Strong Sell).
Other Stocks to Consider
Some better ranked stocks in the gaming sector include Isle of Capri Casinos, Inc. (ISLE), Monarch Casino & Resort Inc. (MCRI) and Penn National Gaming Inc. (PENN). All these stocks carry a Zacks Rank #2 (Buy).
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