Many people think that owning and operating a casino gives you a licence to print money. If only it was that simple!
As the chart below shows, the last 12 months have been vastly different for two companies in the same sector. Crown Resorts Ltd (ASX: CWN) has underperformed the broader market by more than 16%, while SKYCITY Entertainment Group Limited-Ord (ASX: SKC) has outperformed the market by around 5%.
Source: Google Finance
Investors need to be aware that the operations of both Crown Resorts and SkyCity extend far beyond the gaming tables and poker machines and this can have a substantial impact on revenues.
The operations of Crown Resorts and SkyCity are highlighted below:
Crown Resorts
Crown Resorts has some of the best entertainment assets in the world including casinos and hotels in Melbourne, Perth, Macau and Manila. It also has a strong pipeline of world-class projects on its books including the highly anticipated Barangaroo project in Sydney, Studio City in Macau and upgrades to existing hotels in Melbourne and Perth.
Crown is also tendering for new projects including the Queen's Wharf development in Brisbane, while expanding its online wagering and gambling operations.
It's been a difficult year for Crown Resorts' joint venture project in Macau and this has impacted the group's bottom line. Earnings from its Melco Crown partnership declined by 21.5% in the first half as the Chinese government reigned in gambling on the island. The assets in Macau contribute to about 35% of Crown Resorts' earnings and the issues on the island have translated directly into the share price.
Trading conditions in Australia have not been as difficult, but weak consumer sentiment and a slowing Western Australia economy also limited growth in the domestic market.
Although trading conditions look like they may be improving, the next twelve months for Crown Resorts still looks challenging. With that in mind, I think Crown Resorts provides investors with a good long term investment at the current share price.
The stock is trading around 19x earnings and offers a solid 2.8% dividend yield. With exposure to the growing Asian gambling market, investors can expect a much higher share price over the next five years.
SkyCity
SkyCity has a portfolio of five gaming properties located in Australia and New Zealand that have also become entertainment destinations. The properties provide services like accommodation and dining that draw people through the doors and ultimately on to the gaming floors.
The Auckland property contributes around 69% of SkyCity's earnings and trading conditions in that market have been favourable. The company provided a recent trading update that showed strong revenue growth of 10.7% for the remainder of FY15.
Economic conditions have been robust in Auckland and SkyCity has benefited from good consumer sentiment and an increasing number of Asian tourists visiting its properties.
Investors should note that SkyCity is entering a period of significant capital expenditure to expand its properties in Auckland and Adelaide in exchange for favourable gaming regulations. The short-term risk for investors is the possibility of reduced dividends if the new construction impacts on current operations or is not built within budget.
If the projects are completed within budget and on time, the graph below shows the potential impact this could have on earnings and dividends.
Source: SkyCity Company Presentation.
At the current share price, the company is trading on a price-to-earnings ratio of 16 and investors can expect to receive a dividend yield of around 5.3%. Although the current valuation seems pretty good, it is clear that these two projects could potentially transform SkyCity into a more attractive investment if executed successfully.
Foolish takeaway
Although it sounds easy, casinos and hotels are difficult businesses to operate successfully. Crown Resorts and SkyCity are two of the best operators in the sector and investors can be confident they have the potential for strong long-term growth and increasing dividends.
In my view, SkyCity could continue to outperform Crown Resorts for the short term as the Auckland property goes from strength to strength. In the longer term however, I think the world class projects in Crown Resorts' pipeline will allow it to grow earnings at a much faster rate.
