I wrote recently about the changing fortunes – and uncertain futures – of two of our gaming giants, Tatts Group Limited (ASX: TTS) and Tabcorp Holdings Limited (ASX: TAH). Both businesses had too much uncertainty and potential downside for me to place them on my buy list for now, but what about casino king, Crown?
Placing a big bet on betting
Crown was born out of the demerger of the Packer-controlled Publishing and Broadcasting Limited, along with stable-mate Consolidated Media Holdings Limited (ASX: CMJ) in 2007.
It counts among its assets the casinos in Melbourne and Perth, as well as one-third shareholding in Melco Crown Entertainment Ltd (Nasdaq: MPEL), which itself owns casinos in Macau, one of two special administrative regions of China (Hong Kong is the other). Macau is the only part of China in which gambling is legal, making it a Mecca for gamblers and casino operators alike.
Crown also owns the Aspinalls Club in London, and interests in online betting exchange Betfair Australasia and casino operators US-based Cannery Casino Resorts and UK operator Aspers Holdings.
Clearly, then, this is a business that will survive or fail based on the propensity of humans to gamble, and to choose Crown’s establishments in which to do it.
Something for everyone
Crown’s Australian casinos, like their counterparts here and overseas, have turned themselves into adult playgrounds. Restaurants, bars and theatres are important parts of these establishments, either as additional entertainment options or, increasingly, destinations in their own right.
The same is true of the Macau properties, where elaborate ornamentation and larger-than-life entertainment – as well as the gambling on offer – draws huge crowds.
Crown hasn’t been without its problems in recent years. Unfortunately timed acquisitions and developments were made into the teeth of the economic downturn in the US, and the Macau foray underwhelmed investors in its initial stages.
Clearer skies ahead
Having weathered those storms and lost some skin in the process – Crown hit a high of $15 in 2007, and a low of $4.18 around 12 months later – the business seems to have recovered its balance. The shares have traded in a very tight range over the past 2.5 years, as earnings per share initially fell before stabilising between 2009 and 2010, then recovering 15% in the most recently completed financial year.
The company continues to plough its cash into developing and redeveloping its portfolio, but debt only represents around a quarter of Crown’s capital base. After paying out almost all of its earnings in dividends in recent years, Crown has now taken a somewhat more conservative approach, putting a floor under its minimum dividend per share, but setting expectations for a more conservative payout ratio as profits grow. Crown has also bought back around 4% of its shares recently, which should boost earnings per share.
Trading on an historical price/earnings ratio of 18.8 and a prospective P/E of 15.1 based on consensus earnings estimates, the company clearly isn’t cheap based on current earnings rates – but that’s not the play here.
A bet on growth
Crown is setting itself up to run a successful, if mature, Australian and US casino business. I’m sure the company will make opportunistic acquisitions if the price is right, but growth won’t be stellar in these markets.
The growth opportunity sits very clearly in Crown’s shareholding in Melco Crown Entertainment. The business has hitched its wagon squarely to the exploding patronage of Macau’s casinos; a trend it fervently hopes will continue. It has reason for that hope – according to numbers presented at the company’s most recent AGM; gaming in Macau has grown at a compound rate of almost 35% per annum over the past 5 years.
Opportunity and hope squarely underpins today’s share price – if growth in Macau slows, or if Crown can’t garner its fair share of that growth, today’s share price will look inflated in hindsight. However, the sheer size of the Macau market means that the reverse could also be true – a sub-$9 share price may well be a bargain if Crown (and Melco) can successfully ride this particular Asian tiger.
Many a businessman has learned over the past 40 years not to underestimate a Packer – both James’ father Kerry and grandfather Sir Frank were astute businessmen. They weren’t infallible, but won more than they lost (although I’m not sure whether the same can be said for Kerry’s famous penchant for the Las Vegas gaming tables).
James Packer has had his share of demons to face in the past few years, but the business now seems to have stabilised, ready to take advantage of growth in Macau, and recoveries in Australia, the US and the UK.
In that light, the company has a formidable stable of assets, and for an investor who is comfortable with the risk that Macau may not pan out as well as the company hopes, I think Crown Entertainment may well represent a growth story worth being part of.
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Scott Phillips is The Motley Fool’s feature columnist. Scott doesn’t own shares in any company mentioned in this article. You can follow him on Twitter @TMFGilla. The Motley Fool’s purpose is to educate, amuse and enrich investors. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.