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It’s been a busy year for Crown. Executive chairman James Packer demonstrated savvy corporate brinkmanship when, after a few dubious changes to NSW legislation, Crown was handed the rights to develop a new hotel/casino at Sydney's Barangaroo precinct when rival Echo Entertainment’s exclusive NSW casino license lapses in 2019.
Elsewhere Crown’s stake in US-listed Melco is proving a shrewd investment, with earnings from its Macau properties tripling this year.
The market has welcomed these moves with Crown’s share price up 25% this year.
Still, investors should bear in mind that casinos are capital-intensive businesses. Profit growth isn’t free and requires constant spending to be achieved. In return, owners can expect reasonable, yet not outstanding, returns (see Friday Fishing: Punting on casinos). In this context, we’d argue that it’s better to focus on assets rather than earnings when assessing a casino.
On this basis Crown appears expensive, trading at over double the company’s asset value. AVOID.
Longer term there’s also risk to the Australian gaming market from Asian destinations such as Singapore and Macau. This is particularly important for Echo which, unlike Crown, operates exclusively in Australia owning casinos in Sydney, Brisbane and the Gold Coast.
After fending off Packer earlier in the year, Echo's management appear focused on making the most of its recently renovated The Star casino in Sydney. A takeover or partnership with Crown still remains a possibility, just not for now. Echo’s share price has suffered as investors price in the potential for additional competition, but it appears overdone to us. At around book value Echo is fairly priced. HOLD.
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