Early days for a new player
From November 2019, when the Star's casino exclusivity expires, Sydney will have another casino, which will cater primarily to high rollers and premium gamblers, Crown says. The resort will have 350 hotel rooms, conference facilities and 80 apartments, among many other premium features.
We found it interesting that Crown's proposed bet limits on table games do not appear to reflect premium-gambler status, being $30 for baccarat, $20 for blackjack and $25 for roulette. At those minimum-bet levels, Crown's property is likely to cannibalise the Star's mass-market business.
Outlook The project cost for Crown is estimated to be up to $1.4 billion - a capital outlay likely to test management's operating prowess to make an acceptable rate of return.
Just to generate a 12 per cent return on the investment requires earnings before interest, tax, depreciation and amortisation of about $160 million, which is a challenge in a two-casino market. After tax, that would equate to just a mid-single-digit-percentage return. However, a lot can transpire between now and November 2019, including the parameters within which Crown will ultimately be allowed to operate its Sydney property.
Judging by the astute manner in which the company has played this game, the economics of the project could improve markedly as it nears commencement. One should also not discount the possibility that, as a result of competitive tension from Crown's entry into the Sydney market, Australia's share of the high-roller market could increase from its present low level.
Price Crown shares have performed strongly during the past six and 12 months, rising 13 per cent and 50 per cent, respectively. The stellar gains have been fuelled by resilient showings from its Australian casinos and continued strong growth in associate earnings from Macau, aided further by the halo effect from the recent political win in Sydney.
Worth buying? Crown's medium-term earnings outlook remains positive, with its Australian properties on the cusp of reaping the benefits of recent refurbishments, while the big picture continues to be bright for the Macau gaming market and Crown's 34 per cent-owned Melco Crown associate.
We view Crown's success in convincing the government to approve its Sydney plan as a further boost to sentiment. However, the stock is trading at almost 17 times consensus fiscal 2014 earnings per share estimates, with its existing Australian casino businesses valued at close to eight times earnings before interest, tax, depreciation and amortisation. Consequently, we believe it is prudent for those without exposure to wait for a pull back in price before buying Crown shares.
Brian Han is a senior research analyst at Fat Prophets sharemarket research. To receive a recent Fat Prophets Report, call 1300 881 177 or email info@fatprophets.com.au.
Frequently Asked Questions about this Article…
Crown has been invited to move to stage three of the process to build a six‑star hotel and casino resort at Barangaroo South. The proposal includes about 350 hotel rooms, conference facilities and 80 apartments and is aimed primarily at high‑rollers and premium gamblers. For investors, it’s a strategic growth opportunity that could boost Crown’s Australian revenue but also requires a large capital outlay and faces competitive and regulatory hurdles.
Crown’s publicly mentioned minimum bet levels — about $30 for baccarat, $20 for blackjack and $25 for roulette — don’t read like traditional ‘high‑roller’ stakes. At those limits the new property could draw mass‑market customers away from competitors, particularly The Star, potentially cannibalising its business and changing competitive dynamics in Sydney.
The project cost is estimated to be up to $1.4 billion. To generate a 12% return Crown would need roughly $160 million of EBITDA, which is challenging in a two‑casino market. After tax that equates to only a mid‑single‑digit percent return, so the economics need to be carefully managed for the investment to pay off.
Sydney will have another casino from November 2019, when The Star’s casino exclusivity expires. The new Crown resort is expected to target premium and high‑roller customers, which could boost visitor numbers and tourism if it successfully attracts more high‑spending guests to the city.
Crown shares rose around 13% over the past six months and about 50% over the past 12 months. The gains were driven by resilient results from its Australian casinos, strong growth in associate earnings from Macau (including its 34% stake in the Melco Crown associate), and a positive market reaction to its Sydney political win.
The article notes Crown’s medium‑term outlook as positive, but the stock was trading near 17 times consensus fiscal 2014 earnings per share and its Australian casinos valued at about eight times EBITDA. Given that premium valuation, the recommendation was that investors without current exposure might prudently wait for a pullback before buying Crown shares.
Key risks include the large capital outlay (up to $1.4 billion) that will test management’s ability to deliver acceptable returns, the competitive dynamics of a two‑casino market, and uncertainty over the final operating parameters Crown will be allowed to use in Sydney between now and November 2019. Any of these could materially affect project economics.
Yes — the article suggests competitive tension from Crown’s entry could boost Australia’s portion of the high‑roller market from its currently low level. If Crown successfully attracts premium international gamblers, it could improve the big‑picture outlook for the Australian gaming sector.
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