Crown's Portfolio Restructuring and China Practices Make Winning a Japan Gaming Licence Unlikely

Crown Resorts Sells Down More of Its Melco Crown Stake; FVE Unchanged

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Equity Bottom-Up

<div class="content-highlight"><p style="text-align: center;"><strong>Violent sell-off creates an opportunity to invest in Crown Resorts at an attractive price.</strong></p></div><hr><p>Shares in <a href="https://www.smartkarma.com/entities/808" target="_blank" data-smartkarma-citation="entities:808:1">Crown Resorts (CWN AU)</a> are undervalued, trading at a 21% discount to our AUD 15.00 per share fair value estimate. This follows a violent sell-off during recent months, reflecting market uncertainty around the near-term outlook for VIP, and a softening consumer environment, both of which we are positive on, longer term. The growth outlook is underpinned by Crown snatching VIP customers from the Star casino, but also by an influx in Chinese tourists to Australia's two major cities. We believe the market is underestimating the value of the pending Sydney casino. With a superior location and high-end focus, we believe Crown is likely to steal a meaningful portion of Star Sydney's VIP and premium table revenue, while at the same time growing the market. Additionally, with world class facilities in Australia's most popular cities, we believe Crown is well placed to leverage ongoing growth in inbound tourism, particularly from China, which should grow at a double-digit pace for the foreseeable future.</p><h2>Key Takeaways</h2><ul>
<li>While the market has expressed concern about the viability of the Sydney development given the recent challenges faced by the VIP market, we continue to believe it makes a lot of sense. VIP is notoriously volatile; however, as seen in recent years, this market has bounced back strongly. Despite Australia's VIP market growing by around 15% per year on average during the past seven years, we estimate this slice only represents 4% of the global market. Longer term, we expect Australia to capture more share.</li>
<li>The recent market sell-off has created an opportunity to invest in narrow-moat-rated Crown Resorts at a meaningful 21% discount to our fair value estimate. Our fair value estimate implies a fiscal 2019 price/earnings multiple of 24, which is well justified given the strong long-term growth outlook.</li>
<li>We project earnings per share growth of around 12% on average during the next five years. The bulk of this earnings uplift will occur post fiscal 2022, when Crown Sydney comes online.</li>
<li>Crown's balance sheet is in pristine condition following its recent flurry of divestments. We expect net debt to peak at just below 1 times EBITDA during the capital-intensive construction phase of the Sydney casino. This is by no means concerning and based on our estimates, Crown can comfortably tolerate net debt/EBITDA of up to 2 times. Upon completion of the casino, we would not be surprised if the company were to undertake capital management initiatives including either special dividends or share buybacks.</li>
</ul><p><em>Analyst: Daniel Ragonese</em></p>

Violent sell-off creates an opportunity to invest in Crown Resorts at an attractive price.Shares in Crown Resorts (CWN AU) are undervalued, trading at a 21% discount to our AUD 15.00 per share fair value estimate. This follows a violent sell-off during recent months, reflecting market uncertainty around the near-term outlook for VIP, and a softening consumer environment, both of which we are positive on, longer term. The growth outlook is underpinned by Crown snatching VIP customers from the Star casino, but also by an influx in Chinese tourists to Australia's two major cities. We believe the market is underestimating the value of the pending Sydney casino. With a superior location and high-end focus, we believe Crown is likely to steal a meaningful portion of Star Sydney's VIP and premium table revenue, while at the same time growing the market. Additionally, with world class facilities in Australia's most popular cities, we believe Crown is well placed to leverage ongoing growth in inbound tourism, particularly from China, which should grow at a double-digit pace for the foreseeable future.Key Takeaways
While the market has expressed concern about the viability of the Sydney development given the recent challenges faced by the VIP market, we continue to believe it makes a lot of sense. VIP is notoriously volatile; however, as seen in recent years, this market has bounced back strongly. Despite Australia's VIP market growing by around 15% per year on average during the past seven years, we estimate this slice only represents 4% of the global market. Longer term, we expect Australia to capture more share.
The recent market sell-off has created an opportunity to invest in narrow-moat-rated Crown Resorts at a meaningful 21% discount to our fair value estimate. Our fair value estimate implies a fiscal 2019 price/earnings multiple of 24, which is well justified given the strong long-term growth outlook.
We project earnings per share growth of around 12% on average during the next five years. The bulk of this earnings uplift will occur post fiscal 2022, when Crown Sydney comes online.
Crown's balance sheet is in pristine condition following its recent flurry of divestments. We expect net debt to peak at just below 1 times EBITDA during the capital-intensive construction phase of the Sydney casino. This is by no means concerning and based on our estimates, Crown can comfortably tolerate net debt/EBITDA of up to 2 times. Upon completion of the casino, we would not be surprised if the company were to undertake capital management initiatives including either special dividends or share buybacks.
Analyst: Daniel Ragonese

Is Sydney Casino Crown's Ace in the Hole?