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What's new On July 4, the state government, on the recommendation of an independent steering committee, invited Crown Limited to move to stage three of the process for a

What's new On July 4, the state government, on the recommendation of an independent steering committee, invited Crown Limited to move to stage three of the process for a six-star hotel and casino resort at Barangaroo South. The decision, at the expense of exclusive Sydney casino licence holder Echo Entertainment, appears to have turned on the persistently sub-par performance of its Star casino in attracting tourism and boosting visitor numbers.

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

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