• VIP looks to be beginning to show signs of recovery.
• Quality mature assets, which are highly cash generative and difficult to replicate.
• New Sydney casino, if delivered on time and budget, could offer a significant step change in earnings for CWN.
• CWN is leveraged to growth in Australian tourism.
• Continued success of marketing initiatives could bump up VIP performance.
• Capital management initiatives – additional special dividends or share buy-backs.

• Competitive pressures, including international (for VIP play) and domestic competitors.
• Better than expected inbound Chinese tourism numbers into Australia.
• Any construction delays or regulatory risk with Crown Sydney.
• Credit-rating risk (given our expectation of significant capital expenditure over the next five years).
• Regulatory risk.
• Capital expenditure fails to deliver adequate returns.

• Capital management re-announced. CWN re-commenced the previously suspended share buy-back announced on 4 August 2017. CWN intends to undertake a new on-market share buy-back of approximately $400m of shares. Based on the pre-announcement share price of $13.32, the new buy-back equates to approximately 4.4% of issued capital.
• Why is CWN holding on to Aspinalls? Aspinalls continues to struggle, with revenue declining -35.5% to $64.4m and EBITDA fell -54.9% to $12m over the year. Management attributed a number factors leading to the underperformance: (1) higher win rates in the business led a volume decline; (2) disruption from refurbishment work at the club; (3) stricter compliance requirements leading to reduced ability to have funds transferred into the UK; and (4) drop in middle east customers base). Management noted that for clients travelling through to London, Aspinalls does benefit from this volume, however their VIP business in no way reliant on having this casino. We believe management is likely to consider this asset given some of the structural issues at play.

CWN FY18 RESULTS SUMMARY…

In the figure below, we present CWN’s FY18 normalised P&L relative to FY17.

Figure 3: CWN FY18 results summary  

Group overview. 1. Operating revenue of $3.5bn was up +7.9% on prior corresponding period (pcp), driven by +38.2% growth in VIP program play in Melbourne (up +73.9%). 2. Normalised operating earnings (EBITDA) of $878.2m were up +6.1% on pcp, driven by Melbourne (+9.5%) and Wagering & Online (+81.8%). 3. Normalised NPAT of $386.7m was up +12.7 on pcp. 4. Final dividend of 30cps was declared, taking the full year dividend to 60cps, in line with expectations. Figure 4: Revenue breakdown by activity

Source: BTIG, Company

Melbourne. Normalised EBITDA margins in Melbourne declined by 120bps over the year, driven by: (1) strong growth in VIP program, which is a lower margin business; (2) low growth in the main gaming floor revenue, which is a higher margin business; and (3) increased in fixed costs (energy and insurance costs in particular) in Melbourne. VIP coming from junkets. CWN is experiencing increased VIP volume coming from junkets. As management have previously noted, with a reduced business development team, junkets allow more effective way to attract clients given they are more organised and becoming more sophisticated. With direct now being a smaller part of the VIP segment, this clearly has an impact on CWN’s margins. Perth improving, but still under pressure. Perth trading conditions appeared to have slightly improved relative to the first half, using the activity on the main gaming floor as a proxy. In the first half, main gaming floor revenue was down -3.3%. However, for the full year, revenue was down -2.2%, with second half revenue down -0.8%.  Most of the year-on-year decline was attributable to main floor tables. The moderating rate of decline is an encouraging sign for trading conditions. Management called out that the premium end, rather than mass play, remains weak. Sydney capex moving around. Whilst capex for the Sydney project has been moved around, management have maintained their overall project cost estimate at $2.2bn gross ($1.4bn net). Management noted that 80% of the trade work has been contracted in relation to this project, which means less and less chance of the final cost estimate moving out. Management also noted that stage 1 of the apartment sales had closed, however did not disclose any details (e.g. number of apartments). Aspinalls. Aspinalls continues to struggle, with revenue declining -35.5% to $64.4m and EBITDA fell -54.9% to $12m over the year. Management attributed a number of factors leading to the underperformance: (1) higher win rates in the business led a volume decline; (2) disruption from refurbishment work at the club; (3) stricter compliance requirements leading to reduced ability to have funds transferred into the UK; and (4) drop in middle east customers base.

CWN VALUATION

Figure 5: CWN SoTP valuation

Source: BTIG estimates

Figure 6: Gaming Comparables Table

Source: Company

Figure 7: CWN Financial Summary

Source: BTIG, Company, Bloomberg

COMPANY DESCRIPTION

Crown Resorts Ltd (CWN) is Australia’s largest operator of casinos along with hotels and conference centre facilities. In Australia, CWN owns and operates Crown Melbourne Entertainment Complex and Crown Perth Entertainment Complex which services mass market and VIP segments. Overseas, CWN also owns and operates Crown Aspinall’s in London. CWN also has a portfolio of other gaming investments. CWN’s wagering and on-line social gaming operations include Betfair Australasia (a 100% owned, on-line betting exchange) and DGN Games (a 70% owned, on-line social gaming business based in Austin, Texas).