Australia | Aug 15 2014
-Macau drives profitability
-OZ VIP revenue rises?
-MPEL dividend incorporated
-Las Vegas clarified
By Eva Brocklehurst
Crown Resorts ((CWN)) scored a win against brokers in FY14, with results above most expectations. Surprising weakness in the first half, which sent brokers scurrying at the time for pencils and erasers, was reversed in the second half. Consumer sentiment may be soft but Crown appears to be winning on that front too, stating that there was an improvement in trading in the second half despite weak sentiment in Melbourne and Perth as the local economies experience structural and cyclical challenges.
The company's profitability is largely being driven by its Macau joint venture, MPEL, but trading at Australian casinos also improved in FY14. VIP revenue drove most of the uplift and now accounts for 26% of Australian revenue. As a result, brokers acknowledge volatility has increased, given the timing of visits by small groups of high value players. Melbourne's main gaming floor grew 4.3% in the second half as Crown ratcheted up marketing initiatives. Growth in Melbourne was also boosted by the hotel business. CIMB observes Melbourne VIP visits were down 33% in the first half but finished the year down only 1%. Perth hotel occupancy levels were still firm despite a softer macro environment, with revenue growth offset by lower average room rates.
Cost efficiencies that were a success at Crown Melbourne were rolled out to the Perth property and Macquarie expects gradual improvement as FY15 gets underway. Crown will shift the Australian capex focus to Perth from Melbourne, with the opening in late 2016 of the Crown Towers in that city. Sydney capex will also tick up as the Barangaroo project moves forward. Crown has now guided to a total project budget of around US$1.6-1.9bn for the Las Vegas property, providing further details on plans for that development. The market heaved a collective sigh of relief when this figure was announced. Deutsche Bank observes some had suspected the investment could be more like US$4bn.
Earnings resilience, despite subdued economic settings, and consistent domestic assets are supportive of the outlook but international growth remains key, in Macquarie's view. Dividends may be increased, as the company revises up its policy and ties the pay-out ratio to the income stream from MPEL. Earnings from MPEL are expected to contribute 82% of total earnings by FY18, up from 52% in FY14 on the broker's estimates. A burgeoning Chinese middle class should support mass market revenue. Deutsche Bank also took comfort in the reassurance the Melco Crown dividends will be incorporated.
JP Morgan was also relieved about the Las Vegas project costs, noting Crown will take a majority stake in a highly geared vehicle and there are several risks arising from such a competitive marketplace but the funding is likely to be off balance sheet, non-recourse debt.
BA-Merrill Lynch is confident further operating leverage can emerge. Gaming spending appears slightly stronger and the company has a significant development pipeline. Some uncertainty lingers regarding Las Vegas and Brisbane but this is not enough to undermine the investment case, in Merrills' view. Meanwhile, MPEL is solid. All up, the broker believes valuation is attractive for the growth and opportunity that is on offer. Goldman Sachs focused on the positives. Main gaming revenue growth in Melbourne and Perth accelerated in the second half and VIP also improved, with Australia potentially benefiting from declining VIP table capacity in Macau. Capital commitments for Las Vegas have been clarified and the dividend pay-out policy is increased. Adds up to a Buy rating for Goldman with a $19.70 target.
On the other hand, Credit Suisse retains an Underperform rating, not because of any concerns regarding the outlook or operations but because the valuation appears full. The broker acknowledges Crown's ability to surpass expectations, even as consumer sentiment weighs. Crown is in a position to fund its numerous projects that are coming to fruition between 2017-2020 and has partners on most of these. Credit Suisse models for $1.3bn in free cash flow after dividends between 2015 and 2020, excluding effects from development projects.
In addition, proportional consolidation of the MPEL balance sheets adds around $2.0bn in debt capacity by FY18. Credit Suisse suspects the Las Vegas project is not an earnings or yield play but a capital appreciation investment. The broker has run some numbers in this regard and concludes the project is immaterial to value. The value is in the strategic potential that will underpin Crown as a global luxury casino brand. Crown may also benefit if the north end of the Las Vegas strip is built out around the Crown property.
Most brokers on FNArena's database are happy with Buy ratings. There are six. One Hold and one Sell make up the remainder. Consensus target is $19.11, suggesting 21.2% upside to the last share price. Targets range from $15.80 (Credit Suisse) to $24.18 (Merrills).
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