Sydney view: Gaming industry boom a sure bet

By GILES PARKINSON

The effects of September 11 and the economic downturn it encouraged were felt in many sections of the Australian economy - except, it seems, in the betting industry.

The common theme emerging from the casinos and wagering groups that have reported their results these past few weeks is that, crisis or no crisis, Australians love to place a bet.

"Gambling promises the poor what property performs for the rich - something for nothing," muttered George Bernard Shaw. It also offers entertainment.

The theme emerging from the latest results is that the wagering and gaming industries are strikingly similar to the brewing and wine business.

Wagering, like brewing, is an enormous generator of cash. The TAB's results reveal that punters in New South Wales placed $A2.2 billion ($2.7 billion) of bets on horses, dogs and the trots in the December half - and lost $A1.9 billion of it.

The rate of gambling has been surprisingly constant over the past few years, but so have the costs, and while the TAB was able to spin a healthy profit of $A72.6 million from the punters, its margins have barely moved since it became a public company in 1998.

That bothers the investment community. Fund managers demand evidence of growth. Companies are no longer priced on past performance; their shares are bought and sold on their earnings outlook.

It's the sort of investment philosophy that required Foster's Brewing, and lately Lion Nathan, to seek growth and salvation in the wine industry, and has encouraged the likes of the TAB to move into gaming, which, like wine, is a capital-intensive and high-growth sector. Take, for instance, Aristocrat Leisure, which makes the machines that line the walls of RSL clubs and casinos around Australia and, in growing numbers, around the world.

The company said this week that it had just over 30,000 gaming machines in the US and a bit more in Japan. It forecast it would multiply the number of machines in the US by 20 in the next three years and by nearly 50 in Japan.

Elsewhere, markets such as Macau, China, Taiwan, Korea, South Africa, South America and Europe provide exciting opportunities for growth in the long term, the company says.

But gaming is not always a licence to print money, as the TAB found to its cost when it invested $A8 million in a promising gaming company called Mikohn.

It turned out that the TAB had no management control of the company and its finances were in a parlous state. The TAB has written off its entire investment, and promises to be a lot more careful when it mulls up to $A1.5 billion of acquisitions in coming years.

The TAB has also encountered a considerable amount of scepticism over its ability to make money out of its new linked jackpot system proposed for NSW clubs.

The doubts about the company's plan for growth was one of the big reasons for the 10 per cent slide in the share price since its profit announcement on Monday. Its static performance just cannot compete with the double-digit earnings growth promised and delivered by the likes of Aristocrat and Jupiters.

Some other interesting themes did emerge from the TAB results, however. One has been the success of its internet division, which now accounts for more than 5 per cent of total turnover. That compares with less than 2 per cent for retailers such as Coles Myer and David Jones.

The other, almost predictable, development, is Australia's infatuation with sports betting, which now represents the highest growth area of the punting sector.

* Giles Parkinson is editor of AFR.com".