All our chips on Reef Casino Trust (ASX: RCT) in 2022?

Reef Casino Trust (ASX: RCT) owns and leases the Reef Hotel Casino complex located in Cairns, North Queensland. The company was founded in 1993 and is based in Cairns, Australia.  

 

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❶ Reef Casino Trust reports strong rental income following the reopening of the complex and receiving $2.5m in JobKeeper subsidy. (Appendix 4C – quarterly) 

❷ RCT’s FY21 trading update shows a record high profits and dividends. (Estimated Distribution and update) 

 

Following the initial nationwide COVID-related lockdowns, the Reef Hotel Casino complex re-opened for trading on 3 July 2020 in accordance with the Queensland Government’s easing of COVID-19 restrictions. The company reported strong rental income for the following 3 months (point 1 on the chart).  

This strong performance was impressive as the pandemic was still ongoing and the company’s operations were subject to many restrictions, such as capacity limits, social distancing measures, contract tracing measures and COVID safe cleaning. This raised the market expectations of a rapid post-COVID earnings recovery due to pent-up demand and drove the share price from a low of $1.75 to its pre-pandemic levels around $2.90.  

Reef Casino Trust continued to improve revenues and profitability as COVID-19 restrictions kept easing and the company reported record-high revenue and profits for FY21, ending on 31 December 2021 (point 2 on the chart). RCT achieved these results while its hotel room performance was impacted by the closure of Queensland State borders to NSW and Victoria in the second half of the year as well as the closure of international borders during the entire period.  

 

Consumers are shifting their spending from goods to services 

During the pandemic, people were trapped at home and most of their spending went towards goods that they could use at home, such as TVs, appliances and personal computers. But consumer behaviour is now changing. 

With the worst of the pandemic behind us, consumers are keen to return to their previous lifestyles. Most countries and states have re-opened their borders and leisure travel is picking up, as well as food services and hotel occupancies. 

The accelerated goods purchases during the pandemic have also exhausted demand for durable goods. Consumers who bought new appliances or personal electronics last year will not do it again this year. This leaves them with more money to spend on services, such as travel and entertainment. In addition, the lower demand for goods can contribute to easing supply chain disruptions and inflation, which would improve consumers’ spending power. 

 

Easing COVID restrictions continues to help RCT’s business 

Reef Casino Trust’s record-high results for the year that ended on 31 December 2021 were achieved while Australia’s international borders were still closed and there were inter state border closures throughout the year. With the re-opening of Australia’s international borders in February 2022, we can now expect the return of international tourists to RCT’s complex in the months ahead.  

However, there are still some restrictions in certain countries regarding people going back home, which can slow down the return of international tourism to Australia. This particularly affects Chinese visitors to the complex as China has one of the strictest COVID policies in the world. This situation can be expected to improve in the medium to long term. 

According to RCT’s latest trading update, over March and April 2022, COVID-19 restrictions in Queensland have been progressively lifted such that the Reef Hotel Casino is now operating under very few or close to nil COVID-19 restrictions. The company notes an increase in the business since the mask-wearing and sign-in requirements in the complex has been removed. 

Additionally, the ban on cruise ships was lifted in April 2022 and now some 50 plus cruise ships are scheduled to visit the port of Cairns in the second half of 2022, which can have some flow-on effect into RCT’s complex. 

 

How to play Reef Casino Trust

Reef Casino Trust has been on a solid long-term uptrend since the Corona Crash of March 2020 (the blue line on the chart). The company has a payout policy of 100% of distributable profits and paid 29.5 cents in dividends in FY21, which gives it a dividend yield of 9.6% at the current share price of $3.06. We expect things to go in RCT’s favour in the months ahead and the company to make similar profits in FY22.  

We believe that prices near the uptrend line around $2.90 are attractive. This price level is close to RCT’s pre-pandemic levels and we believe the share price can see a high of $3.30 in the next few months. In the meantime, RCT can offer a great dividend yield with a limited downside, which is precious given the current bear market. 

Keep in mind, though, that trading liquidity in RCT shares is not great. 

 

Stop loss at $2.70 

A break below $2.70 would mean that the uptrend is broken and, from a technical analysis perspective, it increases the chances of further declines in the share price. 

 

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Frequently Asked Questions about Reef Casino Trust

• Is RCT an Australian company?

  Yes, RCT is based in Cairns, QLD.  

• Does RCT pay a dividend? 

  Yes, the company paid 29.5 cents in FY21 and we expect a similar dividend for FY22. 

• Is RCT a BUY right now? 

  We think prices near $2.90 are attractive with a stop loss at $2.70.