Brokerage CLSA says it sees compelling value in Australia-based casino operator Crown Resorts Ltd, despite challenges to growth in the near term and concerns about the gaming market in Macau.
“Our cautiousness around Crown is dissipating. Signs of life in Victorian gambling revenue (and consumers more broadly), and increasing confidence the project pipeline is manageable and value-accretive, start to offset concerns around Macau,” CLSA analysts Sacha Krien and David Fabris said in a note on Wednesday, referring to the Australian state where Crown Resorts’ flagship operation Crown Melbourne (pictured) is based.
Crown Resorts, chaired by billionaire James Packer, is also an investor in Melco Crown Entertainment Ltd, operator of casinos in the Macau and Philippines gaming markets.
CLSA, which has a ‘buy’ rating on Crown Resorts’ stock, raised its 12-month price target on the stock to AUD16.38 (US$12.67) a share from AUD14.30. The stock currently trades at AUD12.81.
The CLSA team said that while the stock continues to carry a number of material risks to earnings, the outlook for Victorian revenue growth, the prospects for project gains as well as a possible stabilisation in Macau revenues “suggest that the value is now compelling”.
In Australia, Crown Resorts operates Crown Perth, in Western Australia, as well as Crown Melbourne in Victoria. In October, the company got a 17-year extension on Crown Melbourne’s casino licence.
“Victorian electronic gaming machines revenue growth (4.4 percent [in fiscal] second half of 2015 to date) shows consumers there are responding to low interest rates and petrol prices,” said Mr Krien and Mr Fabris. “The macro outlook for Western Australia is more challenging but Crown Perth should gain from new gaming/non-gaming products over the next few years,” they added.
Crown Resorts has been heavily dependent on earnings from the Macau market, which has seen gross gaming revenue (GGR) fall for 12 consecutive months.
Official data published on Monday showed Macau GGR fell 37.1 percent year-on-year in May to MOP20.35 billion (US$2.55 billion). The latest result means accumulated GGR for the first five months of 2015 also stands 37.1 percent lower than in the same period in 2014.
The CLSA analysts however said average daily table revenue in Macau “appeared to have stabilised at about MOP550 million”.
“If it remains at these levels, consensus and our forecasts are too high,” Mr Krien and Mr Fabris said, adding they expect “new openings to give the market a boost”.
“We expect the market to start to look past near-term earnings pressure with the business ex-Melco Crown (at current prices) trading at 8.1 times FY16 EBITDA [earnings before interest, taxation, depreciation and amortisation], implying negative value for the Perth expansion, Sydney and Las Vegas,” the analysts said.
CLSA also said Crown Resorts’ project pipeline is manageable, as the brokerage reviewed its assumptions by reducing the six-year capital expenditure spend by 2 percent to AUD4.7 billion; increasing apartment receipts by 10 percent; and delaying Crown Sydney’s opening by 12 months.
Crown Resorts’ development commitments spread across Australia, Asia and the United States. The casino operator has ambitions to move into Las Vegas, where it acquired a site in August last year and plans to invest about US$1.9 billion in a new casino resort.
In Australia, Crown is part-way through constructing a new hotel at its Perth casino resort, with targeted completion by December 2016. It has also committed to building an AUD1.5 billion casino at Barangaroo, a regeneration zone on Sydney’s waterfront.
The company has also entered a tender for a new casino in Brisbane, in partnership with Chinese property developer Greenland Holding Group Co Ltd.
Crown Resorts has recently attracted the interest of Macau VIP gaming room investors seeking to send players to the Australian market. The company already does business at Crown Melbourne with Suncity Group Ltd, Macau’s largest VIP room investor by chip roll volume.
In February Jimei International Entertainment Group Ltd – chaired by Jack Lam Yin Lok, one of Macau’s most experienced casino junket executives – said it had entered into an “arrangement” with Crown Perth for its “junket patrons or players to conduct gaming at the Crown Perth Casino”.
In May, Nasdaq-listed Macau VIP gaming room investor Iao Kun Group Holding Co Ltd said it had completed a deal allowing the firm to expand its casino junket operations to Crown Perth Casino and to Crown Melbourne Casino.
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Analyst at Union Gaming Securities Asia