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Mid-Cap

Two undervalued dividend stocks to Buy - Crown Resorts + Challenger Ltd

September 23, 2015 | Team Kalkine
Two undervalued dividend stocks to Buy - Crown Resorts + Challenger Ltd

Crown Resorts



Mixed Results as ongoing Melco Crown pressure offsets Australian resorts and other division’s performance: Crown Resorts Ltd (ASX: CWN) performance continues to be under pressure during the fiscal year of 2015, as the group reported a decline of 17.9% in the normalized net profit after tax year over year (yoy) to $525.5 million. Better gaming revenues from Melbourne and Perth were offset by Melco Crown’s gaming revenue pressure and asset impairments. The group incurred asset impairments of $61.3 million during the period. Reported EBIT fell by 18.6% yoy to $515.2 million while the reported EBITDA plunged 11.4% yoy to $778.1 million in FY15. Crown Melbourne’s normalized EBITDA rose 17.8% yoy while the group’s Perth normalized EBITDA improved by 5.3% yoy, driven by cost efficiency. Crown Melbourne’s main floor gaming revenue improved by 6.9% yoy while Crown Perth’s gaming revenue delivered only 2.6% yoy increase. As per the Australian resorts highlights, revenue rose by 14.0% yoy to $3,209.2 million in FY15, driven by Main floor gaming revenue increase of 5.5% yoy to $1,588.6 million. Non-gaming revenue rose by 4.7% yoy to $664.7 million, while the VIP program play turnover delivered 41.8% yoy improvement to $70.8 billion. Australian resorts normalized EBITDA surged 14.1% to $916.5 million. With regards to the Macau highlights, Crown’s share of Melco crown’s normalized NPAT reached $161.3 million in FY15, which is down by $129.9 million or 44.6% yoy, impacted by the weak gaming revenue across the Macau market on the back of challenging market conditions in Macau. Gross gaming revenue across the Macau fell 26.8% yoy during the fiscal year of 2015, with the gross gaming revenue showing more pressure in second half of 2015 dipping by 37.0% yoy. Meanwhile, CWN delivered a full year dividend of 37 cents per share.

 
Investments in Large Scale Tourism Attractions (Source: Company Reports)

Stock Outlook: Crown Resorts shares fell by about 20% in the last few weeks (as of Sep 11 close) attributed to the weak FY15 performance by the group. On the other hand, the group’s VIP international marketing efforts resulted in a better VIP play turnover during the period. Moreover, the groups Australian resorts was benefited by the exclusion of Super Tax on VIP program play at Crown Melbourne as well as decreasing tax rate of VIP program play from 12% to 9% at Crown Perth. Melco Crown is also opening an entertainment-focused Studio City project next month, and the success of this project can also act as a growth driver for the group. Crown resorts has a decent dividend yield of 3.5%. We view the recent correction would offer an attractive investment opportunity to investors and accordingly give a “BUY” recommendation on the stock at the current price of $10.07.


CWN Daily Report (Source: Thomson Reuters) 

Challenger Ltd



Better than estimated performance drove the shares despite overall market pressure: Challenger Ltd (ASX: CGF) shares recently dipped ~1% (from  Sep 01 to Sep 23), as opposed to the broader S&P/ASX 200 decline by ~4% during the same period. The group’s Assets under management delivered an 18% yoy increase to $59.8 billion in the fiscal year of 2015. CGF also achieved a record total Life product sales growth of 9% yoy to $3.7 billion while the Funds Management witnessed organic net flows of $2.9 billion during the same period. Accordingly, the group’s normalised EBIT rose 13% yoy to $438 million in FY15, while the statutory profit improved by $299 million. CGF delivered a full year dividend of 30 cents, which is an increase by 15% against prior corresponding period.
 

Financial Performance during FY15 (Source: Company Reports)

Investing on future growth: Challenger Ltd is heavily investing in new streams of growth by making partnerships with super funds as well as by expanding their multi-boutique fund manager model into Europe. The group is the seventh largest fund manager. Challenger also has a significant competitive advantage, wherein around 80% of planners who were intending to recommend an annuity use its product. The group’s Funds under management generated a 25% compounded annual returns from 2011. Challenger recently launched CarePlus, a new aged care product to capture the aged care market. Challenger has been generating a solid growth in its cash operating earnings over the last three years, and issued a Life cash operating earnings guidance in the range of $585-595 million during fiscal year of 2016, which is an 11% rise in cash operating earnings on a like-for-like basis. CGF’s return on equity reached 18.6% in second half of 2015, and intends to maintain ROE in the range of 18% for FY16 as well. Challenger is trading at relatively cheaper valuations, as compared to peers having a P/E of 12.85x. The group has a decent dividend yield of around 4.3%. We believe that the stock has potential to grow further, despite delivering year to date returns of 7.5%. Accordingly, we recommend a “BUY” on CGF at the current price of $7.06.


CGF Daily Chart (Source: Thomson Reuters)

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