I think Monty Python summed up this week’s events in Canberra very well in The Life of Brian:

Brian: Excuse me. Are you the Judean People’s Front?

Reg:   *#@* off! We’re the People’s Front of Judea.

Anyhow, enough of Canberra for a few weeks; let’s work out how to make money in Australian equities despite the ongoing political and policy risk that is inherent in Australia.

The key feature of all markets I’m watching is the accelerating outperformance of mid and small-cap growth stocks. I particularly favour larger Australian mid-cap growth stocks (with yield), and below I look at the positive investment case in Crown (CWN), which has a market capitalisation of $6 billion.

The ASX Small Ordinaries Index (XSO) is breaking out versus the ASX20 Leaders Index (XTL). This technical breakout is fundamentally supported by the interim reporting season, which has confirmed stronger earnings and dividend growth in mid and small-caps stock compared with Australian mega caps. The vast bulk of growth ideas I am pushing in my notes are outside XTL.

Crown (CWN): Australia’s luxury leverage – Buy

As regular readers know, one of my key macro themes is being overweight on luxury goods and services stocks as a play on rising Asian wealth. It’s been arguably the best industrial way of playing the rise of the Asian consumer for many years now, but the hardest aspect is finding ways of playing the theme in Australian equities.

For some time I have thought Crown Limited was most likely the answer in Australia, but I wanted to wait to see confirmation of this at the interim earnings release. After Friday’s stronger-than-expected first half-year earnings per share (EPS) and dividend per share (DPS) results, Crown in my view is the only liquid way to play this luxury Asian consumer theme in listed Australia.

Crown is the only ASX-listed company of any scale set up to capture the structural growth of Asian luxury spending. Not only does Crown own 30% of the City of Dreams Casino in Macau, which I recently visited and wrote bullishly about (gaming revenues are consistently beating all analyst forecasts), but their Crown Melbourne and Crown Perth Casinos are the only truly high-end complete offering in Australia.

On Friday, Crown increased its stake in Echo Entertainment (EGP), the owner of The Star in Sydney, to 10%. In the medium-term, it’s not impossible that Crown would monopolise refurbished, casino assets in Melbourne, Sydney and Perth. Echo shares got excited by this development on Friday, but I suspect hopes of a full takeover offer are premature.

Crown has high-end accommodation, high-end restaurants, high-end shopping and high-end gaming. They are the only tourism properties in Australia aimed right at inbound, cash-rich, Asian tourists, and in the case of Perth, a few cashed-up miners as well – I’m convinced Crown Perth will become the only place to stay and play in Perth.

Very Bullish

I’m very bullish on Crown, feeling the stock is undervalued versus its strategic position and earnings growth. I have been doing some back-of-the-envelope calculations on Crown and I reckon you get the Macau exposure effectively for ‘free’.

In my view, casino assets globally trade at around 12-times EV/EBITDA (enterprise value/ earnings before interest, taxes, depreciation, and amortisation), yet Crown as an entity trades at around 10.5-times. However, when you strip out the value of its Melco asset in Macau, the EV/EBITDA multiples drops below eight-times, which is ridiculously low for monopoly casino assets in growth jurisdictions. It’s also worth noting that regulatory risk in terms of poker machine reforms in Australia have fallen sharply (Andrew who?).

The chart below shows that Crown shares have basically gone sideways for two years as they went through a high capex spend period, the ramp up of Macau, and perceptions of regulatory risk. But the capex spend is coming to a conclusion, Macau is going better than anyone predicted, regulatory risk has evaporated, and this stock will be re-rated to a global casino multiple, if not a global luxury brand multiple, through time.

Crown has tracked sideways on the ASX

You can also see that James Packer’s Consolidated Press Holdings has increased its stake in Crown to 46%. I am very happy to co-invest alongside Consolidated Press and I think it increasing its holding is a very positive signal about the outlook for Crown.

Crown is cum-dividend of 18 cents and cum consensus upgrades to both earnings and valuation. If you believe in ‘luxury’, you need to own this company. It’s also worth noting the quality and depth of its board, arguably one the strongest in Corporate Australia.

Crown directors

• Mr Christopher Corrigan
• Mr Ashok Jacob
• Mr Harold Mitchell
• Mr Geoff Dixon
• Mr James Packer
• Mr John Alexander
• Ms Rowena Danziger
• Mr Rowen Craigie
• Mr Michael Johnston
• Mr Benjamin Brazil
• Professor John Horvath
• Ms Helen Coonan

Go Australia, Charlie.

Important information: 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. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

Also in the Switzer Super Report

• Peter Switzer: There’s a blue sky behind those dark clouds
• Ron Bewley: How to design your own ‘core-satellite’ portfolio
• Andrew Bloore: Should I take out insurance using my SMSF?