UPDATE 2-Echo earnings surprise on upside; casino braces long contest with rival Crown

Wed Aug 13, 2014 12:39am EDT

* Normalised EBITA A$439.1 mln vs A$430-A$435 mln guidance

* Rival high end casino opening 1 mile away from The Star

* Investing A$100 mln a year to keep customers (Recasts with Crown opening, analyst comments)

By Byron Kaye

SYDNEY, Aug 13 (Reuters) - Australian gaming group Echo Entertainment, which has been gearing up for a looming battle with a rival luxury casino a mile from its key Sydney asset, posted full-year earnings that beat its own forecast.

Echo said on Wednesday that its Sydney gaming house The Star was the standout performer as the group booked a 12 percent jump in earnings before interest, tax, depreciation and amortisation (EBITA) for the year to June 30.

The Star's contribution to the group's EBITA leapt thanks to a loyalty programme, which also helped Echo expand its share of the slot machine market in Australia.

But analysts say The Star is poised to lose some of its lustre when billionaire James Packer's Crown Resorts opens a high roller facility in late 2019 to capitalise on the growing appetite of well-heeled Chinese for travel and gaming.

"They are taking the right steps building a loyalty program, but the reality is they're going to have a shiny new property just across the way which is going to take away business," said a gaming analyst who asked not to be named because he was not authorised to comment on the matter.

Echo has said it will spend A$100 million ($92.80 million) a year trying to ensure it keeps clientele of The Star once Crown's new casino opens, including upgrading its high-end gambling facilities - the biggest expense. The Star's EBITDA contribution jumped 14.8 percent to A$298.8 million in the last fiscal year.

Echo, which counts Southeast Asia's biggest gaming group Genting Bhd among its major shareholders, has been under pressure to improve its earnings since losing a campaign last year to keep an exclusive gaming licence in Sydney.

Outside Sydney, Echo is competing with Crown for a licence to build a casino in the Queensland state capital Brisbane.

In Queensland, Echo will also be spending A$345 million overhauling its Jupiters Gold Coast casino. The newly pitched high-end operation is expected to open in the current financial year, the company said.

THE NEW NORMAL

In the year ended June 30, normalised earnings, which take into account actual gambling wins versus forecast wins, rose to A$439.1 million. That beat Echo's own guidance of A$430-A$435 million, sending the company's shares as much as 7 percent higher on Wednesday.

Normalised group revenue rose 3.8 percent to A$1.97 billion.

Despite the strong domestic performance, Echo's future earnings will be hit by lower normalised revenue at its VIP business as the company changes the formula it uses to calculate its wins against its forecast win rate, analysts said.

The new formula will "more closely approximate normalised results with the actual win rate", Echo said.

In a research note, Deutsche Bank analysts said the new formula will "have a minor negative impact on market numbers", and would have cut the company's 2014 EBITDA by A$8 million. (1 US dollar = 1.0792 Australian dollar) (Editing by Ryan Woo)