Japan’s Universal Entertainment Corp finds itself at an “exciting inflection point” according to boutique investment bank Union Gaming, with upside potential at Okada Manila, legal victory over former Chairman Kazuo Okada and stabilization of the pachinko and pachislot business all painting a favorable outlook.
In a Monday morning note initiating Union Gaming’s coverage of the Japanese giant, analyst John DeCree describes Universal as a “special situation” due to the multiple headwinds it has faced in recent years and long-awaited emergence from a trio of concerns.
Among the three key factors that have led the company to this point, DeCree points specifically to its conflict with former Chairman Okada, stating Universal “can finally declare victory in its long and arduous legal battle with its former chairman Kazuo Okada as the highest Japanese appeals court for trust litigation upheld a ruling that essentially prevents Mr Okada from regaining any control of the company.
“As a safeguard, Universal has also undergone a corporate restructuring to prevent Mr Okada from having any control over the casino businesses even if he somehow regained a Board seat. While the legal battle will likely linger, it appears that there is virtually no way for Mr Okada to regain any control or influence over the company, removing a long-running overhang for the shares.”
Also significant is the impending completion of the final 350 hotel rooms in Tower B of the company’s Philippines integrated resort, Okada Manila, which are scheduled to come online in 2Q20.
“This will give the property its full complement of rooms (~1,000) to help accelerate mass market revenue growth,” DeCree said. “Further, Okada Manila has not been impacted by the same VIP headwinds Macau casinos are facing with VIP volume up 30% QTD at the property – pointing to a solid 3Q19. The Philippines is one of the fastest growing gaming markets in the world, and when complete, Okada Manila is positioned to be a category killer in the market.”
Finally, DeCree expects sales of pachinko and pachislot machines to accelerate in 3Q19 under regulations requiring machines to be replaced every three years.
“After several quarters of tepid replacement sales, there is a significant number of units in the existing installed base that are required to be replaced beginning in 3Q19,” he said.
As such, Union Gaming has initiated a Buy rating on Universal shares with a target price of JPY4,250.
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