We hold Crown Resorts (CWN) in our core equity portfolio. The size of the position has been diluted as portfolio size grew, but it is still a major position and on our list of shares to watch. As the Australia Stock Exchange 200 largest stocks are dominated by financials and resources. CWN provides an effective diversifying benefit with exposure to the tourism and entertainment sector.
The business of owning integrated Casino and Resort while attractive from the simple concept that the house always win is really a play on tourism and consumer discretionary spending.
We see Crown through 3 primary perspectives.
1. Direct benefit of Australia domestic discretionary spending and tourism.
2. Strong development pipeline
3. Exposure to Macau gaming through investment in Melco Crown
The Australian to US Dollar has declined significantly since peaking at $1.10 AUD/USD. It is our view that the first act in the Chinese boom is materials then the second is tourism. It act as an automatic stabiliser for the economy that cushion the Australian economy post peak in resource capital expenditure.
In December 2016, market rumor swelled that CWN could be privatized by its largest shareholder. Since then there has been limited news and from news reports the plans have been shelved.
Given the depressed performance of Melco and Perth. It is positive in our view that the talks never materialized as any move on privatization would be opportunistic and removed potential gain in recovery in these markets. Short term pop in the stock would be a long term loss in investment value.
It could be worse as holders of Crown hybrids listed on the ASX can attest. ASX CWNHA and CWNHB prices fell significantly as these hybrid notes would be much riskier given that shareholders equity would be replaced by debt in a privatization structure. Additional risk include the potential holdback of interest until maturity where maturity can include up to 60 years if CWN does not call these notes. This show the true risks of investing hybrids.
Crown Resort Assets
Crown Melbourne accounts for a significant portion of the groups earnings. The extension of the casino license into 2050 provides a certain degree of earning stability going forward.
Growth projects in Melbourne includes potential hotel room expansion through Schiavello group. At this stage total capital expenditure and room has not been provided.
The group has been undertaking capital expansion in Perth with a new luxury hotel (estm 500 rooms) estimated to be completed by 2016 year end. Total project cost estimated to be $645m and completed in FY16. Even as conditions in the market are not as hot as when the project was first envisaged.
Given the lack of high end luxury accommodation in Perth, it should still be well received by the market.
Crown was awarded a casino license in Sydney in 2014 and in 2015 signed agreements with Barangaroo Delivery Authority and Lend Lease to develop the Casino. It is expected to be online late 2019 post expiry of The Star’s casino monopoly. Update since original launch shows that it could be delayed to 2021 given the delays in development application and final plans for the site.
At this stage the total project is the ball park of $1.7 billion however this is purely high level estimate.
We are conscious that these projects in the pipeline would require significant capital expenditure from the groups free cashflow. Given sole/duopoly in casino licenses in each city. We are confident value will be created above hurdle rate of return.
Outside of Australia Crown has 2 major highlights. Crown’s 34% investment in Melco Crown which owns Casino in Macau and Philippines.
Macau gaming markets has gained recent attention due to large decline in gaming revue as result of Chinese corruption crackdown. The increase in Mass market gaming has not offset severe offset fall in VIP gaming earnings.
We are optimistic that the worse is over for Macau where there are signs that decline has been slowing. Melco Crown is well positioned transition from pure gaming to entertainment/casino resort.
Macau Market Update
Macau Gross Gaming Revenue has declined significantly from its peak in 2013/2014. The rate of decline look to have slowed in early 2016 and showing signs of stabilization.
The decline is revenue is primarily driven by the anti corruption drive China. Macau VIP gaming deteriorated near 30% annualized rate while the mass gaming market revenue fell only slightly above 10%.
Given signs of improvement in Macau, we are more confident of our call on CWN but it is important to note that this is based on signs of slowing decline rather than stabilization and increasing revenue.
Crown Debt Maturity Profile
Above maturity profile shows limited repayment risk in the next 5 years. The capex requirement to fund the growth will be partially from current cash on hand and potential future debt raises.
Crown is funding growth through debt. Although equity raising is not on the cards nor the balance sheet is stretched. Given the pipeline with potential Sydney and Las Vegas resorts, final price tag will determine if these projects can be funded internally.
Boots on the ground
Recent trip to Macau gave an impression that current pure gaming focus is at its limits where alternative entertainment options are limited at best.
Melco Crown’s new Casino, City of Dreams would provide an advantage over other Casinos in Macau. The only question is when will mass market offset the decline in VIP gaming. Changes in Chinese visa requirements is a positive step. Albeit offset by additional risk of complete smoking ban in 2016.
Melco Crown stake held in Crown has declined due to price decline in the Melco stock. Any future decline in AUD hedges the value in Melco.
Crown Full Year 2015 Results
Crown released results which were mixed at best.
Just the facts: total net profit came in at $446.3m down 36.5% year on year before significant items. The parents share of earning came in $385.0 million, down 41.3%.
Underlying results showed that gaming in areas where we expect out performance were mixed. Melbourne was the standout result with great with year on year EBITDA increase of 17.8% on a normalized basis.
Perth while had a slower 5.3% increase in normalized EBITDA. We feel this is due to weak domestic WA economy (which we saw in GEM Results). This is coupled with a lower than average occupancy due ongoing construction works.
Management forecast almost half of the capital expenditure has been spent year to date with another $330 million to go in FY16.
Weak Macau earning through 34% ownership of Melco Crown Entertainment was expected.
MCE highlight additional risk of Studio City of receiving lower than requested gaming tables which could pose risk to the downside. This is possible with rumored banking covenant predicated on receiving a certain level of gaming tables in Macau.
The importance of funding the current projects in the pipeline can be seen from the balance sheet changes throughout the year. Particularly bank funding was decreased as Crown set out another subordinate debt offering and maintain future flexibility to fund Crown Sydney.
Crown Sydney is the next project coming up after the completion of Crown Perth renovations along with the expansion of another hotel in the JV in Melbourne. While total project spend for Sydney is fluid at this stage. Total price tag of $2 billion is expected.
Cash flow in FY15 was also stretched due to payment of additional license fees in Victoria.
James Packer resigned as Chairman of the company with intention of taking up executive responsibilities. We suspect primary focus will be on Las Vegas and digital footprint of Crown. This is reinforced by the 60% acquisition of DGN Games.
Another result, another write down. Minor asset impairment looks to be a regular occurrence. I guess when your juggling with so many projects, not everything will stick.
CWN Dividend Dates 2017
Interim Ex-Dividend Date: 23 February 2017
Interim Record Date: 2 March 2017
Interim Dividend Payment Date: 17 March 2017
Final Ex-Dividend Date: 22 September 2017
Final Record Date: 6 October 2017
Final Dividend Payment Date: 26 October 2017