Australia | Aug 13 2012
– Crown delivers solid profit result
– Margins under some pressure from structural and cyclical headwinds
– Developments offer upside longer-term
– Stock not pricing in the growth potential
By Chris Shaw
Casino operator Crown Limited ((CWN)) reported full year net profit after tax of $513 million, a result viewed by the market as solid given a weak consumer backdrop. This was more apparent at the group's Melbourne operations, while Burswood in Perth delivered a strong result for the period.
The earnings result revealed some pressure on margins, Macquarie attributing this to evidence of structural and cyclical headwinds impacting on Crown's VIP operations. Asia is offering increased competition for this end of the business, while the broader macro economic slowdown is impacting on the contribution of Crown's Macau interests.
This is forcing Crown to increasingly rely on junket operators to deliver in terms of VIP gaming, Macquarie noting this driving the squeeze on margins in the premium business.
On the plus side, Macquarie notes Crown is now better positioned to expand margins by leveraging increased gaming capacity and from a general pick-up in the economy. This may not become evident in FY13 given higher taxes and some ongoing disruptions to the business as the Melbourne facilities continue to be revamped.
While Crown's headline result was boosted by some one-off corporate items, stripping these out meant brokers have made relatively modest changes to underlying earnings forecasts. As examples, JP Morgan has lifted earnings per share (EPS) forecasts by around 2% for both FY13 and FY14, while Citi has trimmed its estimates by 7-7.5% to account for higher borrowing costs and a lower contribution from Melco-Crown.
Consensus EPS forecasts for Crown according to the FNArena database now stand at 61.8c for FY13 and 70.8c for FY14.
Management updated on capital management with the result, Citi noting a potential hybrid issue has been flagged in order to maintain Crown's current investment grade credit rating. A $500 million issue should leave debt ratios at comfortable levels, Citi estimating such a move could dilute EPS by around 5%.
The result showed Melco-Crown's contribution to earnings grew by 289% in the period, this division now representing 18% of group earnings. The mass premium strategy is gaining traction in Citi's view, while the business continues to offer new development opportunities in markets such as the Philippines.
With respect to further developments in Australia, Macquarie notes management remains of the view it would not be possible to justify significant investment in luxury hotels without suitable gaming concessions. As an example, the proposed new development at Burswood is expected to include approval for an additional 130 gaming tables and 500 machines.
This may present something of an issue at Barangaroo in NSW though, as Credit Suisse notes while Crown has exclusive rights to negotiate a hotel development at the project, Crown needs to either secure a joint venture of control of Echo Entertainment ((EGP)) in order to extend that licence or have another casino licence issued by the NSW government. The latter is seen as unlikely in Credit Suisse's view.
Post Crown's profit result broker views remain largely positive, as the database shows six Buy ratings compared to two Hold recommendations. The result saw Credit Suisse trim its forecasts and price target, leading the broker to downgrade on valuation grounds. RBS Australia also rates Crown as a Hold, reflecting its view investors will need some patience given the potential for some shorter-term pain before long-term benefits become apparent.
The Buy argument for Macquarie is Crown has shown the ability to generate solid earnings growth despite a difficult operating environment, which is attractive in the current market. JP Morgan also rates Crown as a Buy, though cautions the share price may not full re-rate until the market has greater clarificiation with respect to Crown's stake in Echo Entertainment ((EGP)).
Citi also sees value at current levels, especially given Crown's exposure to the Macau market. This value is not being priced into the stock at current levels according to Citi, who sees the 13 times earnings multiple for FY13 as too low for the earnings growth potential on offer.
Citi's price target for Crown is $9.70, which compares to a consensus target according to the FNArena database of $9.94. Price targets range from RBS at $8.70 to Deutsche Bank at $11.30.
In a stronger overall market shares in Crown today are slightly higher and as at 1.40pm the stock was up 1c at $8.57. This compares to a trading range over the past year of $7.47 to $9.29. The current share price implies upside of around 16% relative to the consensus price target in the FNArena database.
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