The Crown Resorts Ltd (ASX:CWN) share price rose 6% after this morning's announcement, which revealed a big drop in both underlying profit and gaming revenues. Here's what you need to know:
- Normalised* revenue fell 13% to $1,483 million
- Normalised* Earnings Before Interest, Tax, Depreciation and Amortisation (EBITDA) fell 9% to $439 million
- Statutory net profit after tax (NPAT) rose 75% to $359 million due to sale of Melco Crown shares
- Underlying net profit after tax (NPAT) fell 9% to $191 million
- Dividends of 30 cents, plus special dividend of 83 cents
- $500 million buyback for approximately 6% of issued capital
- New dividend policy to pay 60 cents per year, subject to performance (76 cents last year)
- Proposed Crown REIT IPO will not proceed, due to capital freed up by Melco Crown sale
So What?
It was a tough year for Crown, with VIP gaming revenue plunging 45%, alongside a 0.8% decline in main floor gaming revenue. Elsewhere, resort occupancy and revenue remained strong, while small online gambling ventures reported a loss. Crown also cancelled plans to launch a new company comprised of its land assets, the 'Crown REIT Initial Public Offer (IPO)'. Thanks to the sell down of Crown's stake in the Melco Crown joint venture, Crown has enough funds to proceed with its development activity, making the IPO unnecessary.
Management also declined to provide an outlook for the full year, although the proposed buyback and special dividend should bring meaningful benefits to shareholders in the near term.
The decline in VIP gaming – widespread across the industry but particularly serious at Crown – followed on from a concerning announcement last year about the arrest of Crown employees in China. Those employees, including a Vice President of the VIP international team, apparently remain in custody.
Crown told the market on 20 October last year that: "Less than half of the revenue from Crown's international VIP gaming programs is currently generated by visitors from mainland China. Consequently, this segment of the business represents approximately 12% of the Crown Group revenues in FY16."
At a guess I'd say that Chinese VIP gamblers are reluctant to associate with Crown businesses, for fear of being arrested themselves. I am not certain if I understand this segment correctly, but with the 45% decline in VIP turnover, it looks as though Crown has lost virtually all of its Chinese VIP business.
Now What?
Despite the weaker core business, Crown looks to be in an OK position due to its stronger balance sheet and some of the development opportunities underway. A share buyback and special dividend are a decent reward for shareholders who have been sorely tested in recent times.
However, at today's prices I think that much of the benefit of these initiatives is already factored into Crown. I would prefer to wait for more information on how the business is performing, and whether the VIP business will recover, before buying shares today.
