Shares in Crown Resorts Ltd (ASX: CWN) fell by over 3% on Friday after announcing earnings results and a dividend that were below expectations from analysts. Crown announced that group underlying net profit rose 29.4% for the half to 31 December 2013, however the gains were entirely due to the terrific growth seen in the company’s Melco Crown Joint venture.
Australian Gaming Revenue a Concern
While analysts accepted the boost in profitability as a positive, the poor performance of the company’s Australian assets drove the share price fall. Crown warned the market in October that Australian gaming revenues were trending flat, however analysts were still expecting better than a 0.6% fall in main-floor gaming revenue.
The major point of concern for Crown’s CEO Rowen Craigie and many analysts’ reports was the 33.1% fall in VIP gaming turnover in Melbourne. Mr Craigie blamed a ‘super tax’ placed on the company’s VIP gaming earnings by the Victorian Government. The base tax rate of 14% on VIP business increases to 22% depending on revenue results, which is above the flat 10% payable in NSW and the flat tax rates in Singapore and Macau.
VIPs Avoiding Australia?
While the company blamed the tax for the poor result, it should be noted that rivals Echo Entertainment Group Ltd (ASX: EGP) and SKYCITY Entertainment Group Limited-Ord (ASX: SKC) have also reported patchy VIP revenue for the half.
This could be part of a longer-term reduction in Asian high-roller spending in Australia, or simply seasonal variation due to the Chinese New Year period. I’m betting on the latter as Crown’s well-informed management team wouldn’t be investing heavily in Australia if VIP revenues weren’t expected to rise in the future.
Simply a bargaining chip?
An interesting side-note is that Crown’s management is currently in negotiations with the Victorian government about increasing the tax on poker machines. The VIP result may be getting more coverage from the company as a way of leveraging negotiations in their favour.
What about the dividends?
Interestingly, despite analysts noting that the flat dividend payout of 18 cents per share was below expectations, the company had flagged previously that dividends would be steady in the near term as the company embarked on a number of growth initiatives across Australia and Asia. A non-event in my eyes but don’t expect Crown to be regarded as an income-stock any time soon.
The soft Australian result was part of an overall pretty strong result from Crown Resorts. It’s becoming clear that the group’s Asian growth strategy is proving a good investment and will differentiate the company from its peers in coming years if growth in the Australian market continues to be disappointing. Crown looks expensive but any pullback due to the earnings result should present investors with a long-term buying opportunity.
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