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Stock of the Day - Crown Resorts (BUY)

Crown Resorts Limited (CWN) appears to have assets capable of performing well in the long-term. Developments including opening of City-of-Dreams Manila towards the end of 2014, opening of Studio City Macau in mid-2015, opening of Perth Crown Towers by 2016 and New Tower at City-of-Dreams Macau in the beginning of 2017, will provide an edge over others for CWN. Then, good progress is also expected for CWN’s Sydney and Las Vegas properties in the near future. Further, we note the on-track progression with regards to the Melbourne new hotel and apartment complex. These all along with other assets in Brisbane and Japan, contribute to CWN’s long-term strategy. Purely, 2015 will underscore the beginning of the five-year period in which Crown and Melco Crown earlier committed to about $9 billion worth of casino developments across the globe.


Exploring Opportunities Through-out Japan (Source – Company Reports)

For the Company, the earnings mostly emanate from Australian operations, nonetheless, CWN has foreign currency exposure resulting from its investment in Melco Crown and the Aspinall’s Club in the UK. From domestic standpoint, CWN is encountering tough trading conditions which nonetheless are equipoised by margin expansion and improving return on invested capital.

A recent slump in Macau’s gross gaming revenues has been observed but the revenues are expected to rebound once structural reorganization is complete. More particularly, December 2014 Macau gross gaming revenue fell 30.4% y/y. Lower earnings contributions from Melco Crown were noted. Melco Crown’s table market share increased by 140bp to 14.6%. Given the situation, CWN’s dividend may be expected to be flat yoy. Harder rules on junkets and transit visas which are expected to affect VIP & mass through 1H15 may lead to a fall in the growth rate with a recovery expected in 2H15. Though the casino operator’s earnings are getting affected from ongoing softness in Macau’s gambling market, the favorable currency movements might help CWN. The FY15 earnings-per-share forecast may be lowered but there looks to be a rise in FY16 and FY17 outlook. Specifically, the Company’s Australian casinos appear to be trading at implied multiples of 14.7 times FY15 earnings and an enterprise value to EBITDA multiple of 5.8 times.


Performance for FY14 (Source – Company Reports)

Few key aspects to note include that 4Q2014 saw Melco Crown to be the biggest VIP rolling market share winner in Macau. Melco Crown was, in fact, a stand-out among its peers in Macau, and is expected to post the strongest EBITDA growth in 2015. More or less, the operational track record and financial profile of Melco and its subsidiaries has continued to support the ratings and outlooks.

MCE - City of Dreams Manila, Philippines (Source – Company Reports)

A latest blow revolves around CWN’s expected walk away from a plan to build a $US400 million ($491 million) casino and hotel in Sri Lanka after the island nation elected a new president, Maithripala Sirisena, who has promised to block the project. However, with a lot of other development work on agenda, this step might not curtail growth to a huge degree.

There are also certain risks including regulatory risks, funding risks and execution risks. Out of these, regulatory risks and execution risks are more to do with external environment and can only be regulated to some extent. Nonetheless, the spread of CWN’s assets and projects at different stages of development can manage the aforesaid risks. Whereas, CWN’s persistent efforts in adding additional projects would help manage funding risks as much as possible. 


Crown Perth Normalised Revenue and EBITDA Performance (Source – Company Reports)   

Factors such as weakened Chinese economy and efforts towards curbing corruption may pose hurdle in the path of growth for CWN’s Macau assets. But announcement of a joint venture property development with Schiavello to build a five-star ­luxury resort in Melbourne has been a highlight in the times of tough market conditions. Then the recent combination of BetEasy’s sportsbook business with that of CWN’s Betfair appears to be fruitful for the Company to some extent, while providing an enhancement of the recent acquisition of the remainder of Betfair not earlier owned by the Company.



CWN Daily Chart (Source - Thomson Reuters)

Another game-changer may be the government’s decision on the preferred proponent for the Queen’s Wharf precinct which is expected in the first half of 2015. For this, CWN and Echo Entertainment have revealed their designs for a multi-billion dollar integrated resort and casino at Brisbane’s Queens Wharf.

The pressures might continue but given the assets CWN has and the long-term play planned to be illustrated, we reinstate a Buy recommendation for this stock at the current price of $12.23.