Before I buy any company, I want to be sure I'm getting the best possible bang for my buck.
Crown Resorts Ltd (ASX: CWN) and SkyCity Entertainment Group Limited-Ord (ASX: SKC) are two companies which offer attractive competitive advantages through their respective monopoly positions.
Their strategic approach is also similar, with both companies moving beyond pure casinos to building 'entertainment hubs' which draw people in and deliver diversified revenues. But which company is best will depend on your investing approach. Here's why.
Growth investors
Both Crown and SkyCity are undergoing massive transitions as they invest aggressively in long-term growth.
SkyCity is significantly expanding its existing Auckland and Adelaide entertainment hubs in exchange for favourable gaming regulations, while Crown is spreading its brand into new locations including Sydney and Las Vegas, as well as the Philippines through its 34.3% holding in Melco Crown Entertainment.
Once finished, the geographic diversification of Crown's projects will help to balance the risks faced in any particular market, but as greenfield projects they involve more initial capital expenditure. This would suit investors with a longer time horizon.
Because SkyCity's growth is bolted on to existing successful operations I view this growth as lower risk than Crown's. According to Citibank analyst Michael Goltsman SkyCity's projects should also produce a higher return on investment. His analysis was done before SkyCity revised the amount it will invest on the New Zealand International Convention Centre project, but SkyCity is still expecting a step-change in earnings.
Value investors
Value investors will want to get a sense of the relative value for the two companies. Given the current phase of investment we want to strip out the impact of deprecation and finance costs and just focus on earnings. To do this we can use the Enterprise Value-to-EBITDA ratio (EV/EBITDA).
EBITDA is Earnings Before Interest Tax Depreciation and Amortization, which places the spotlight on the cash a company is producing from operations, something the Price/Earnings ratio doesn't do as effectively. The enterprise value is a company's market capitalisation, adjusted for net debt.
| Company | Market Cap | Net Debt | EBITDA (TTM) | EV/EBITDA |
| Crown Resorts | $9.49 billion | $2.282 billion | $840.6 million | 14.0 |
| SkyCity Entertainment | $2.43 billion | $643 million | $292.2 million | 10.5 |
Source: company reports. TTM= Trailing Twelve Months (normalised)
At current prices SkyCity looks to offer more value for money, with a lower enterprise value per dollar of EBITDA earnings.
However this static snapshot does not account for the potential growth to come. One way to interpret the difference is that investors are anticipating higher growth from Crown going forward. Given the large projects Crown has underway this seems reasonable, but obviously comes with risk.
Dividend investors
Crown and SkyCity both have well defined dividend policies for investors looking for cash returns.
Crown's policy offers to pay the higher of 37 cents per share (cps) per year, and 65% of Net Profit After Tax (NPAT). Similarly, SkyCity's policy is for a minimum dividend of NZD 20 cps per year and not less than 80 percent of annual (normalised) NPAT.
Payouts have been reasonably steady over the past two years for both companies and at current prices Crown offers a dividend yield of 2.9%, while SkyCity sits around 4.2% (depending on the NZD/AUD exchange rate).
Both can be expected to grow going forward as major projects are completed and earnings rise, but SkyCity's higher level suggests a more mature company profile.
Which to buy today
Crown and SkyCity are two well-rounded companies offering growth, competitive advantages and dividends. In my view conservative and income focused investors will be drawn to SkyCity, while growth investors with a longer time horizon should consider adding the diversification of Crown to their portfolio.
