All-in on Packer’s global vision for Crown

Chief Investment Officer and founder of Aitken Investment Management
Print This Post A A A

With all the press on Crown Resorts (CWN) re-entering the Las Vegas market, and associated share price volatility, I thought it was worth updating our view on Crown.

For the best part of two years now, I have had a high conviction buy recommendation on Crown. Crown’s share price is up 105% in that period and delivered more than double the return of the ASX/S&P 200 Index.

That recommendation started after a visit to Macau, where it became clear to me that James Packer was building an Australian-listed, global luxury brand.

The big picture

I want to make it very clear that my support for Crown starts right at the top. I believe in the structural growth of Chinese outbound tourism (100 million pa+), particularly as GDP per capita surpasses $8,000. I also believe in James Packer’s vision to build and operate a series of global assets to cater for and capture that structural growth.

The most rewarding investment ideas are when the macro and micro come together. What I am trying to do is identify a strong structural growth theme and then pick the Australian stock with the maximum medium-term leverage to that structural growth theme.

I realise in the shorter-term I may have to forgo some dividends to pay for the growth capex phase, but shorter-term dividend pain will be longer term capital growth and sustainable dividend gain.

That is exactly what is happening in Crown right now, with Packer rightly choosing to avoid the current Australian corporate fad of lifting payout ratios (reducing future growth) to feed the quacking dividend seeking ducks.

Instead, Packer and minority Crown shareholders are forgoing short-term dividend growth to invest for future growth and future diversity of earnings (via currency and geography). It is exactly the right medium-term corporate growth strategy.

In fact, Crown has been feeding some of the quacking income seeking ducks via issuing domestic hybrid debt to fund growth, rather than dilutive equity issues. With term retail debt the cheapest to issue in modern history, why wouldn’t you issue it over equity, particularly when your equity is undervalued versus the growth profile it offers? I would expect more hybrid issues from Crown in the future and no equity issue of any form. With Packer controlling 50.1% of Crown, this is an important point. Anyone hoping for a discounted equity issue to fund growth will remain disappointed.

Of course, many people look at Crown’s project pipeline and correctly say “they have a lot on”. Some worry they won’t be able to manage it all, but my view is those concerns are misplaced as Packer continues to hire the best people from the destination casino industry to manage the development of each project. It may even end up that the future CEO of Crown comes from a global group.

What happens in Vegas

Similarly, I had a lot of questions this week about Crown re-entering the Las Vegas market. Many people were concerned that last time around the foray into Las Vegas was a disaster. It was, but if you look at the partnering of this new deal, it is much smarter (Wynn execs, OakTree). I believe people learn from their mistakes. I think this is particularly relevant to James. Nobody hates losing money more than him and in my opinion he would simply not have re-entered the Las Vegas market without avoiding the pitfall structures of the previous deal.

It’s also worth noting James is spending a high percentage of his time in the USA. This is different to previously and seems to be correlated with very successful personal investments in Ratpac Entertainment (Gravity), Beats (bought by Apple) and Zillow Inc (+100%).

The Crown share price has lost around 5.5% this week on very heavy trading volume (3.3% of the free float traded Tuesday alone) since the confirmation of dipping the toe back in the Las Vegas market, most likely because people are looking backwards for guidance rather than forward. The fact the announcement didn’t have much financial detail probably added a fraction to the uncertainty. Crown has lost A$740 million in market cap for what so far is a US$280 million investment. That seems very harsh treatment.

I believe this will prove another short, medium and long-term buying opportunity in what will prove to be one of Australia’s few true global growth stocks. As I said above, the vast bulk of large cap corporate Australia is forgoing future growth via playing to the lifted dividend payout ratio trend. Sure, that gives you a near-term sugar hit for your share price, but at the bottom of the global cash rate cycle with a re-accelerating global economy, the capital gains and outperformance from here will be generated by companies that can demonstrate genuine earnings growth. There is CLEARLY a scenario where GROWTH stocks outperform YIELD stocks sharply over the next few years. That is my core investment and trading strategy.

The major growth project pipeline is above and the capex and net-debt/EBITDA profile is below.

The simple summary is Crown can fund its expansion plans particularly now it is receiving a dividend stream from MPEL. What also isn’t taken into account in the forecasts above is sales revenue from selling ultra-premium apartments in Sydney that could bring down the overall capex spend quite significantly.

The real story

Now this is where I am most interested: Crown’s EPS growth profile.

Crown is scheduled to release FY14 results on Thursday 14 August.

We believe that will confirm Crown grew EPS by +33.3% in FY14 with MPEL contributing 49.1% of NPAT. The only weakness could come from the domestic assets.

But FY14 is the past and FY15 and FY16 is the future. In FY15 and FY16, we see a combined EPS growth of another 35.8%. The forward PE combined is 29.5x. Divide that all by two and you’re paying an average PE of 14.75x for average EPS growth of 17.9%, or a PEG ratio of .82x.

That price to growth ratio (PEG) of .82x for the next two years (averaged) is too cheap. I suspect some of the cheap PEG ratio is driven by the flat dividend growth for the next few years, but as I say above, that will become less of an issue over the next few years as investors put less of a weighting on dividend growth/dividend yield and more of a weighting on EPS growth.

Crown is not an “instant gratification” stock. You need to believe in James Packer’s global vision and his ability to deliver it. There will always be doubters and cynics. Similarly, you are going to have to wait for a significant dividend uplift once the major capex cycle is complete.

A global player

However, the reward is clearly there. I can see no large cap Australian industrial stock with a stronger organic growth profile that is internally funded. Similarly, Crown is increasing its offshore earnings streams as the Aussie dollar bubble bursts.

If our forecasts prove accurate, Crown will generate EPS of 120c in FY16. I believe the market would pay 18x for that EPS stream once it becomes comfortable it will be delivered. And 18 times 120c equals an 18 to 24 month price target on Crown of $21.60, or 40% above the current share price.

Australia has very few true global consumer brands. It has no listed global luxury brand, let alone one directed right at the fastest growing population on earth. Crown will become our first true global-listed luxury brand and as that becomes more obvious to all in the years ahead, a PE premium will be applied over companies that operate only in the mature Australian marketplace.

Investors should use this pullback to increase weightings in Crown, weightings that I believe are currently too low relative to Crown’s growth profile.

I am “all-in” on Packer’s global vision; we’ve made great returns backing him so far and this journey is nowhere near complete.

Crown remains a high conviction buy and core Australian portfolio holding.

Go Australia, Charlie

100% of Charlie Aitken’s fees for writing for the Switzer Super Report are donated to The Sydney Children’s Hospital Foundation.

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.

Follow the Switzer Super Report on Twitter

Also in the Switzer Super Report:

Also from this edition

View More Articles