Crown Resorts: Result 2015
Recommendation
It was a case of the good, the OK and the ugly with Crown Resorts' (CWN) 2015 result. Investors initially appeared to concentrate on the latter, with Crown shares declining more than 6% in early trading before recovering to finish the day down 3%.
Yet despite the share price volatility, there weren't any real surprises in the result. Before we look at it in detail, however, a word on gambling company jargon is necessary.
Due to casinos' winnings from VIP customers being volatile as a result of the large amounts they bet, companies like Crown report their statutory results and also 'normalised' results. Normalised results adjust the statutory figures to reflect the theoretical rather than actual win rate from VIPs, with VIP revenue, taxes paid on VIP bets and commissions casinos pay to junkets for VIP business all adjusted accordingly. Assuming the theoretical win rate is accurate, the normalised results give a better reflection of current performance.
Key Points
Macau poor
Crown Melbourne good; Crown Perth less so
Remains a BUY
Macau poor
Let's first look at the ugly part of the result.
Normalised net profit (NPAT) from Crown's 34% ownership in NASDAQ-listed Melco Crown Entertainment (MPEL) declined 45%, from $291m to $161m. Like all casinos in Macau, MPEL is still suffering from the corruption crackdown by the Chinese government and the slowing Chinese economy.
This has mostly affected the former Portuguese colony's VIP business but more than 90% of MPEL's earnings before interest, tax, depreciation and amortisation (EBITDA) now comes from non-VIPs. While MPEL's casinos such as City of Dreams are competing fiercely with other Macau casinos for their business, this means MPEL won't suffer greatly should MPEL management be correct in its belief that VIP revenue will never return to its previous heights.
As we noted in Betting on Crown – parts one and two, we don't know when the decline in Macau gambling revenue will cease, let alone reverse. And with a number of new casinos either recently opened or due to open shortly – including MPEL's 60%-owned Studio City, which is due to open in October 2015 – the 68% increase in hotel rooms and 54% increase in gambling tables could make things even more difficult in the short term.
Yet over the longer term, improved infrastructure, the diversification of both Macau and nearby Hengjin Island's economies into non-gaming businesses, and increasing tourism from mainland China as its standard of living continues to rise all bode well for MPEL's prospects.
Australia better
By contrast, Crown's Australian casinos continue to perform well.
Crown Melbourne – the 'good' part of the result – reported a 16% increase in normalised revenue, from $1,931m to $2,234m. $206m of this increase was from VIPs, a 41% increase from 2014, while less wealthy punters did their bit too, accounting for another $70m of the increase.
Year to 30 Jun | 2015 | 2014 | /(–) (%) |
---|---|---|---|
Revenue ($m) | 3,424 | 2,951 | 16 |
EBITDA ($m) | 825 | 783 | 5 |
D&A ($m) | 263 | 244 | 8 |
EBIT ($m) | 562 | 538 | 4 |
NPAT ($m) | 526 | 640 | (18) |
EPS (c) | 72 | 88 | (18) |
DPS (c) | 37* | 37 | - |
* 19 cents final dividend, 50% franked, ex date 23 Sep | |||
Note: all figures are normalised rather than actual except for DPS |
After accounting for operating expenses, gaming taxes and commissions, Crown Melbourne's normalised EBITDA increased $100m or 18%, to $662m.
While we don't expect such significant increases to continue, Crown's monopoly in Melbourne, the city's continued popularity as a tourist destination and additional investment by the company should mean Crown Melbourne's earnings increase at least by economic growth over the long term.
Unfortunately, its smaller sibling on the west coast didn't fare as well. With Western Australia's economy continuing to suffer from the mining downturn, normalised revenue from ordinary punters at Crown Perth only increased 3%, from $485m to $498m. As in Melbourne, however, VIP revenue experienced strong growth, albeit from a lower base, rising 44% from $173m to $249m.
All up, Perth reported a 5% increase in normalised EBITDA, to $254m, an increase we deem 'OK'. Crown is attempting to attract more ordinary punters by making its facilities more accessible – such as through its recently opened new car park – and by using the same marketing and promotion strategies that succeeded in Melbourne. Moreover, the completion of Crown Towers in the next year or so – which features 500 luxury hotel rooms and private gaming salons – should make Crown Perth even more attractive to VIPs.
Expanding VIP market?
The removal of the 'Super Tax' on VIPs in Melbourne from 1 Jul 14 and the reduction in VIP taxes in Perth from December 2014 has allowed both venues to compete more successfully with foreign casinos for VIPs.
However, it's not just Crown that has significantly increased its VIP business recently: competitors in Australia such as Echo Entertainment (see Echo Entertainment: Result 2015) and in New Zealand have also done so. Management believes this shows casinos in the Antipodes are competing for VIP business less so with themselves and more so with their foreign counterparts in Singapore, the Philippines and Macau.
If VIP revenue from Macau has been forever compromised, then it's likely that recently completed redevelopments such as Echo's The Star and future developments such as Crown Sydney will mean Australia and New Zealand permanently increase their share of the global VIP market on the basis that these developments make the Antipodes a more attractive place for VIPs to gamble. Assuming they don't engage in irrational competition, this will benefit both Crown and competitors such as Echo alike.
Still a Buy
Increases in corporate costs, depreciation and interest along with the decline in Crown's earnings from its investment in MPEL meant normalised net profit declined by 18%, to $526m. Nevertheless, the board declared an unchanged final dividend of 19 cents per share (50% franked).
Crown shares have fallen 3% since Echo turns tables on Crown in Brisbane on 21 Jul 15 (Buy — $13.33) and the stock remains a BUY.
Note: Our Growth Portfolio owns shares in Crown.