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Brokers Approve Crown Resorts Restructure

Australia | Dec 20 2016

This story features CROWN RESORTS LIMITED. For more info SHARE ANALYSIS: CWN

Amid a soft trading update, casino property operator Crown Resorts has outlined initiatives to simplify its business and enhance the balance sheet.

-Crown Resorts trading update suggests VIP turnover down sharply in year to date, amid softness at Perth casino
-New strategy a lower cost alternative to de-merger, given reduction in MPEL stake, abandonment of Alon
-Enhanced returns via buy-back and special distribution

By Eva Brocklehurst

Crown Resorts ((CWN)) has undertaken several initiatives to enhance shareholder value and restructure its business, including abandoning its Alon project in Las Vegas, reducing its stake in the Melco joint venture (MPEL) and offering a special distribution and buy-back.

The company has also provided an update on trading conditions in the year to date. Overall, normalised revenue for FY17 is down around 12%, principally from a 45% drop in VIP turnover and the, largely anticipated, softness in Perth. The company explains the magnitude of the decline in VIP turnover as exacerbated by a particularly strong prior corresponding period.

The company will sell 13.4% of its MPEL shares to Melco for $1.6bn, reducing its holding to 14% from 27.4%, and has entered into an underwriting agreement for the sale of an additional 2.8% to realise $290m. A swap arrangement for an additional 5.5% should reduce ownership further, to 5.7%. Closing the transaction is conditional upon the receipt of Macau regulatory approval and Melco's financing arrangements.

Proceeds will be used to reduce net debt by $800m and fund a special distribution of $500m as well as fuel a share buy-back of $300m. The special distribution is expected to be paid in the fourth quarter coinciding with the buy-back.

The transaction marks a significant restructure of the business mix, with around 95% of EBIT (earnings before interest and tax) now coming from the domestic portfolio. UBS also notes the strong signal that Crown is intent on reducing debt.

While exposure to longer-term growth in Macau has now been reduced, the broker expects the sale of the MPEL shares should be viewed positively by investors, given an implicit 30% discount that was applied to the shares within the company's share price.

UBS also believes the Alon project would have struggled to achieve a return exceeding the company's cost of capital. A sale of the Las Vegas land would be a positive for the broker's investment thesis

Macquarie considers abandonment of the Alon project a positive as the company is exploring alternatives to optimise the value including an outright sale. The broker estimates that Crown has invested $257m in the project and expects this to be recovered via a sale of the land.

Market Pleased With No De-Merger International

As a result of these latest initiatives the company has opted not to proceed with its proposed de-merger of international investments, which Macquarie believes the market will be pleased with. Still, this is insufficient to offset the re-basing of earnings expectations.

The company continues to prepare for the proposed IPO and disposal of a 49% interest in some of its Australian hotels and associated retail property, subject to prevailing market conditions. Macquarie suspects the process will be difficult, given rising bond yields, the macro environment and the status of the company's capital management program.

Macquarie downgrades to Underperform from Outperform, noting enduring weakness in Perth, lacklustre growth in Melbourne and fragility in VIP turnover underpin a weak outlook.

Deutsche Bank reduces forecasts for earnings per share by 2% to incorporate both the trading update and the initiatives. The broker maintains a Buy rating, as the stock is trading at a 20% discount to the revised valuation. The company envisages the sale will enable investors to better evaluate the financial and operating performance of the Australian assets and considers this a prudent alternative to the proposed de-merger.

The company will end up becoming an almost pure Australian casino play with no debt during FY18, Credit Suisse observes. The value apportioned to the domestic casinos supports the broker's valuation of the stock at around $13. Earnings per share are downgraded 7-10%, with the elimination of MPEL associate income and lower casino revenues partly offset by interest expense savings.

Credit Suisse does not model any permanent damage to the Crown VIP brand following the arrests of Crown personnel in China a few months ago and expects a recovery in VIP turnover over time.

Crown has achieved a significantly lower cost alternative, in Citi's view, with the benefits from the strategic initiatives outweighing earnings downgrades. The broker lowers FY17-19 forecasts for earnings per share by 13-14%. City retains a Buy rating, but valuation and target fall following the revisions to earnings forecasts and the incorporation of the reduced stake in MPEL.

FNArena's database has four Buy ratings, one Hold (Morgan Stanley, yet to update on the changes) and one Sell (Macquarie). The consensus target is $12.60, suggesting 13.6% upside to the last share price. Targets range from $10.95 (Macquarie) to $14.57 (Deutsche Bank). The dividend yield on FY17 and FY18 forecasts is 7.1% and 4.7% respectively.

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