The inside scoop on Crown Limited

By Brendon Warton of Platypus Asset Management

How long have you held Crown?

We initiated our position in Crown Limited (CWN) shortly after it posted a solid FY13 result. We have been building the position over the past two months.

What do you like about it?

Crown continues to find high quality investment options that provide it with a very high growth profile, particularly for a company of its size.

Most significant is Crown’s one-third stake in Melco Crown (MPEL), providing exposure to Macau gaming revenues driven by Chinese customers. This unique exposure continues to grow at 20-plus percent, off a substantial base. In response to this escalating demand, a fifth tower is being built at its flagship City of Dreams casino in Macau and construction on Studio City, a $2 billion casino resort, is due for completion in 2015. It is expected that Melco Crown will begin paying a dividend in 2014, which would very roughly add 15% to Crown’s net profit after tax.

Domestically, the growth prospects are more subdued but still attractive. The two domestic casinos that Crown runs have continued to improve operational efficiency and margins will continue to expand. The Perth casino has recently undergone a refurbishment and rebranding and will benefit significantly from the roll out of 500 more slot machines over the next five years. The completion of a 1,200 room hotel complex will complete its transition to a high quality venue, more comparable to its Melbourne venue, which is Australia’s best casino.

How is it better than its competitors?

Crown’s only serious competitor in Australia is Echo Entertainment (EGP). Crown runs its gaming floors much more efficiently than Echo, as evidenced by far superior margins, despite having more VIP business.

In addition, the properties owned by Crown are higher quality offerings. When the Barangaroo Casino opens in 2019, The Star will no longer have a monopoly in NSW and will likely suffer losses in the VIP business, in particular, but also in the mass market. Crown’s superior product means they attract more VIP business (67% more VIP business in Melbourne compared to Sydney).

What do you like about its management?

Management is well established and experienced. Chief executive officer Rowan Craigie has held his position since 2007, and has continued to impress each passing year. Its desire to pursue growth-driven capex projects will hold it in good stead going forward. Equally as important has been management’s focus on operational efficiency, which has ensured good returns in tough conditions.

What is your target price on Crown?

A $22 target over the next 12 months, is justified by an impressive growth capability over the next several years

At what point would you sell it?

There are a few risks associated with Crown that could lead to downgrades. If growth in Macau begins to plateau, then Crown loses a large amount of its appeal. This could be caused by a tightening of Chinese visa restrictions, gaming tax increases, or a weakening Chinese economy.

Conditions in Melbourne have been poor in the past 12 months. If the Melbourne venue sees a continued deterioration in its ability to generate revenue growth, then the market could ascribe a lower multiple to the stock.

How much has it added to your overall portfolio over the last 12 months?

Crown has added 0.16% to performance.

Where do you see the value?

There are a few factors the market is yet to realistically price in. If Crown’s venture in the infant Philippines market is successful, and Manila becomes a genuine casino destination, then this will be particularly value accretive. Most have been quite conservative in their estimates, so there is potential for value generation here.

The same applies to the smaller Sri Lankan Casino that has recently received the necessary approvals to begin construction.

The very generous terms Crown was able to negotiate with the NSW government in allowing Sydney’s second casino at Barangaroo will also add value.

Brendan Warton is portfolio administrator at Platypus Asset Management

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.

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