brw put the boot in

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    Burswood long shot
    By Tim Treadgold

    The biggest bets at the Burswood casino are not being placed on the gaming tables; they are on the Perth casino itself. Speculators have been plunging heavily into the shares of Burswood in the belief that a takeover offer is on the way. There is a strong chance a bid will come, most probably from interests associated with Kerry Packer, but the high price of Burswood Limited shares means that the margin left for profit is about the same as playing roulette, and unattractive to a serious investor.

    Over the past two months, Burswood shares have risen 22.8%, from 70¢ on May 30 to 86¢ on August 1, despite warnings from management that profit in the year to June 30 will be down about 45% on the $20.6 million earned last year.

    August 28 is the scheduled date for the release of the profit result, but the company warned on August 1 that earnings would be about $11 million, which, if confirmed, will represent the third successive year of falling earnings for the biggest gambling house in Western Australia. Stronger profits are expected in the years ahead, but the low returns on a business that had $363 million in turnover last year make for dismal analysis of Burswood's investment fundamentals.

    At its most recent share price, Burswood is trading on a price/earnings multiple of 26.1, one of the highest of any company in the hotel, restaurant and leisure sector, and 39% higher than the 18.78 average for consumer discretionary stocks.

    Top stockbrokers, such as JBWere, have upgraded their tips on the stock in expectation of the takeover bid that many believe will follow the removal in September of a state government-mandated 10% limit for any single shareholder. But even with the promise of a bid, the best JBWere can give Burswood is a rating of "market perform" in the short-term and "hold" for the long-term.

    "We recently upgraded our short-term recommendation to market perform based on the possibility of corporate activity," JBWere says. "Our current valuation of Burswood is 78¢, but we estimate a buyer could potentially pay around 85¢." In other

    words, the stock is already 1¢ above what the broker considers a fair takeover price, and 8¢ above its valuation.

    Interest in Burswood has been fuelled by its near-monopoly status in the WA market, a position protected by a government agreement granted almost 20 years ago to help underwrite development of the casino, hotel and entertainment complex on what was an old rubbish dump on the eastern outskirts of Perth. Big-name investors such as Packer, and fellow members of the BRW Rich 200, Bill Wyllie and Jack Bendat, have taken positions or have traded in and out of the stock.

    Packer's interest is linked to the ownership by his Publishing & Broadcasting of Melbourne's Crown casino. The potential cost savings from merging Burswood with Crown are estimated to be $10-$15 million a year. However, Packer has so far been using Burswood as a trading opportunity, selling most of his 4.9% stake in the stock when it last approached the $1 mark, in 2003.

    Wyllie and Bendat have preferred to sit on their stakes in Burswood. Wyllie, who recently handed his seat on the Burswood board to a close associate, Ian Hoad, is at the 10% investment limit, having paid an average price of about 72¢. Bendat is understood to have paid about 65¢ for his 4.5%. Wyllie and Bendat are as much interested in Burswood's property portfolio as its gaming business.

    For Burswood management, the next few months will be a case of enduring the great Chinese curse of "may you live in interesting times". Chief executive John Schaap has a standard response when asked about the threat of a takeover: "Speculation has been around for a long time, but we're not in any merger talks."

    Despite a big upgrade of facilities and the promise of more to come, such as a new hotel on the site, Burswood has not aged well. Once a prime destination for Asian high-roller gamblers, the casino today is more likely to be inhabited by busloads of pensioners on a day trip. Troubles in the aviation business have caused WA tourism to decline. The high rollers have moved on (or gone broke), and Schaap has been forced to battle manfully to develop the underlying business - with little success, as shown in the falling profits.

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