The Crown Resorts Ltd (ASX: CWN) share price is down 9.6% since April, and I think it’s now a good time for investors to add this company to their portfolios.
Background on Crown Resorts
Crown Resorts is an operator of gaming and entertainment businesses in Australia, Macau and the United Kingdom (UK). The group operates casinos, hotels, restaurants and online services. Crown currently has a market capitalisation of $8.6 billion.
Why I think the Crown shares price is a buy
The Crown share price has been punished since United States-based takeover suitor Wynn Resorts withdrew its $16 per share takeover plan in April. Since then, however, another suitor has come on board buying just under 20% of the company’s stock. The buyers are the Ho family of Macau, owners of the Melco Resorts & Entertainment brand. They have declared that, with regulatory approval pending, they will buy up a larger stake. Melco shares have dropped since, likely based on the fact that investors are concerned about how its balance sheet will absorb Crown. For Crown shareholders, market expectations are pointing in the right direction for a takeover.
Crown has a price-to-earnings (P/E) ratio of 28.10x, which seems high compared to the ASX 200 with its P/E ratio of 18.31x at the time of writing. However, earnings are expected to be better for the 2019 financial year which will reduce the P/E ratio.
Crown has a grossed-up dividend yield of 5.9%, which is a great return at the current cash rate of 1%. So far, dividends in 2019 look to be the same as those in 2018 at 60 cents per share.
Another positive note for Crown is the pending opening of Crown Sydney in 2021. This will provide a significant boost to earnings as the group expands its customer base to another major Australian city. Additionally, Crown is a 50% partner in a new hotel set to open in Melbourne with construction starting this year. As a business, Crown appears sustainable and has the potential to pursue growth alone if a takeover does not proceed.
Crown has a debt-to-equity ratio of 29%, which can be considered reasonable. This is modest given the expansion projects underway that will contribute to earnings.
Crown is a takeover target and has a solid business that has significant upside potential. While the current valuation may appear a little high, I think it’s justified and the group offers a great dividend yield. I think the Crown share price is a buy.
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Motley Fool contributor Chris Chitty has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Crown Resorts Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.
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