Is Crown worth a gamble?


Who’d want to be a gambler?

The theory that the house always wins, was proved true yet again today, as James Packer’s Crown Limited (ASX: CWN) reported a bumper net profit of $513.3 million for the year.  On revenues of just over $2.8 billion, that’s a healthy profit margin of 18%.

Earnings per share came in at 69.8 cents, and the company declared a 19 cent dividend, franked at 50%, which equates to a dividend yield of 4.3%, based on the current price of around $8.66.

The results were helped by a 289% jump in earnings from Crown’s Macau joint venture with Melco Entertainment. Earnings rose from $34.9m in 2011 to $135.8m in 2012.

As you might expect, casinos have a very clear theoretical advantage over punters. Its know as the theoretical win rate. An above-theoretical-win-rate contributed $68.7m to the group’s net profit. I won’t go into the statistics around that, but the theoretical win rate against high rollers is 1.35%. Crown’s win rate against the VIPs in its Australian casinos was 1.58%.

The company’s CEO, Rowen Craigie said that the results for Crown’s wholly owned casinos, Crown Melbourne and Burswood, were mixed. Reasonable growth was observed during the year, but in some areas was offset by higher operating costs. Results softened in the second half, particularly at Crown Melbourne, partly due to ongoing refurbishment.

The company continues to invest in its casinos, announcing an additional $568m spend to build a six star hotel and new gaming facilities at its Burswood casino in Western Australia. Crown has also signed an agreement with property developer, Lend Lease Group  (ASX: LLC), to build a $1 billion, six-star hotel at Barangaroo, on Sydney’s foreshore. Although Crown has said it will only develop the hotel if it receives regulatory approval to operate high roller casino facilities on the property.

Casinos across Asia are competing to attract Asian VIP high rollers, with Macau and Singapore the biggest competitors to Australia’s casinos. According to the Australian Financial Review, the regional market is worth $50 billion in revenue.

Crown also reported that it had substantially reduced its holding in Tabcorp Holdings Limited (ASX: TAH). Crown had acquired 4.9% of Tabcorp prior to it demerging the casinos business into Echo Entertainment Group (ASX: EGP). Crown still holds 10% of Echo, and applied to the NSW and Queensland regulators for approval to increase its stake up to 25% in July 2012. Given the decision can take up to six months, it’s unlikely to be made any time soon.

Crown needs Echo’s support (or a change of mind by the NSW government) to build a second casino in Sydney, with Echo holding the exclusive licence until 2019. Whether the licence can be split between Echo’s The Star casino and Crown’s proposed casino, or whether Crown has to apply for a separate licence, remains to be seen.

The Foolish bottom line

Sometimes it pays to watch the billionaires. They didn’t get where they are by making expensive mistakes, and an investment in Crown appears a better bet than a flutter on their tables. Odds are, the house always wins.

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Motley Fool writer/analyst Mike King doesn’t own shares in any companies mentioned. The Motley Fool‘s purpose is to help the world invest, better. Take Stock is The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it’s still available. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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