Hot Stock- Crown Resorts

Friday 26th August 2016

Reinvesting in Australia

What’s new?

Crown Resorts’ reported a FY16 result that was in line with expectations. While Macau has continued to drag on Crown’s earnings, the upshot is that the company has now reduced its exposure to the region in order to focus more on growth opportunities in its core Australian business. This makes sense, given the fact that the company’s domestic business is performing well and has a number of potential growth opportunities.

For the 12 months ending 30 June 2016, Crown Resorts reported an underlying net profit of $406.2 million, with this representing a 22.7 percent decline on the previous corresponding period. While this is substantially less than the statutory net profit of $948.8 million, the key reason for the variance was the inclusion of the net proceeds from the partial sale of the company’s stake in US listed Melco Crown Entertainment (MCE).

From our perspective, the key point to note from Crown Resorts’ FY16 results is that aside from Macau, the company’s operations performed as expected. In particular, we note that both Crown Melbourne (+1.1 percent) and Crown Perth (+0.8 percent) reported higher EBIT that more than offset a 17.4 percent decline at Crown Aspinall’s, while wagering and unallocated costs were significantly lower.

In terms of Crown Resorts’ equity accounted profit from Melco Crown Entertainment (the company still owns 27.4 percent of the joint venture), the key driver of the 64 percent decline in the venture’s normalised net profit to $58.1 million was Macau. While there is anecdotal evidence to suggest that earnings from Macau has stabilised, Crown Resorts has nonetheless reported a $602 million net gain from the partial sale of its shares in MCE.

Outlook

The upshot of all this is that while Crown Resorts continues to have some exposure to Macau through its equity accounted interest in MCE, the recent sale has provided a timely boost to the company’s balance sheet. As at 30 June 2016, Crown Resorts had net debt of $2.0 billion (and shareholder equity of $5.1 billion) with undrawn bank facilities of $1.3 billion and no major debt maturities until FY20.

This of course is something of an advantage given Crown Resorts’ upcoming Crown Sydney Hotel Resort development at Barangaroo South, which is expected to be up and running by 2021. The required investment to get Crown Sydney up and running is expected to build over the next several years, with this coinciding with the decision (in June 2016) to adopt a new dividend policy that distributes 100 percent of the company’s normalised net profit.

Price

Crown Resorts’ shares are currently trading at around 21.2 times the FY17 earnings estimate, and offering a dividend yield of 4.2 percent. While this represents a premium to the broader market, there are in our view good reasons for this. These include the resilient core business and upside from the recently announced shareholder initiatives and Macau. The technical set up is also generally supportive of medium-term momentum remaining to the upside.

Worth buying

While Crown Resorts’ key valuation metrics are by no means cheap, we expect this hurdle to be addressed by the implementation of the company’s recently announced strategic initiatives. There is, in our view, a clear strategic rationale for Crown Resorts pursuing a demerger of select international assets and the IPO of an Australian property trust, while positive anecdotes on Macau are also supportive.

James Lennon is a senior analyst at investment research and funds management house Fat Prophets. To receive a recent Fat Prophets Report, CLICK HERE

Disclosure: Crown Resorts is held within the Fat Prophets Concentrated Australian Share and Small& Mid-Cap models.

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