LR Index leisure stockwatch September 2008

Leisure Report, Oct, 2008

After a month of some respite, UK leisure stocks came under more pressure in September as the collapse of Lehman Brothers and rescue deals for Merrill Lynch and AIG sent shockwaves through the world's financial systems.

Adding to the pain came the news that in Las Vegas revenues are down 3% in the last 12 months, making this the worst year since September 11. Morgan Stanley, in a research note entitled Weekend Break, noted that: "With 2008 year-to-date falls of 6%, it appears likely that the full year will be even worse than 2002.

"The magnitude of the declines is calling the defensiveness of the betting and gaming sector into question and may concern investors in European betting stocks."

"We think investors are questioning the perceived logic of betting and gaming's defensiveness. Historically, there has been a fairly low correlation between spending on betting and gaming and economic activity. However, data from the US suggests that the economic slowdown is affecting Las Vegas to a greater extent than in any previous cycle. Gaming has a much higher penetration than in prior cycles, and it seems that the correlation between the economic cycle and Vegas revenues is increasing. Non-gaming and entertainment also contributes a growing proportion of Vegas revenues, and this appears to be more economically dependent than gaming spend.

"Despite the differences in structure, the UK bookmakers are not without risks, and our bear cases are for 30% peak-to-trough ebit declines. Paddy Power highlighted that it views betting as economically dependent. It found that average stakes had grown 83% since 2000, driven by strong growth in the Irish economy. It also said that it found a 59% correlation between growth in UK gambling spend and growth in GDP per head over 1972-1993. Since 1993, the relationship in the UK has broken down. Paddy Power attributes this to the launch of the National Lottery and the emergence of FOBTs. However, we also note that stake per slip has barely grown in this period, despite continued strong economic growth. With relatively low stake per slip and increasing participation in sports betting, we expect the UK to remain relatively defensive."