It took a while, but Crown Resorts directors eventually acted on James Packer’s long-held conviction the sharemarket had substantially undervalued the gaming conglomerate due to the downturn in the Macau gaming industry.
The recent announcement of initiatives to increase shareholder value sent the shares to 10-month highs around $13 before the subsequent fall in the broader post-Brexit panic — it is currently trading at about $12.06.
And yet we still see value in the stock and have not sold any shares from our model portfolio.
Here are the key elements of Crown’s three-way restructure:
• De-merge the following assets into a new, separately listed holding company: the 27.4 per cent stake in Macau’s Melco Crown casino consortium, the Alon development site in Las Vegas, the 50 per cent interest in British casino group Aspers and the 20 per cent interest in Japanese restaurant brand Nobu.
• Float a 49 per cent interest in a property trust that would own Crown’s Australian hotels.
• Move to pay out all earnings from the remaining Crown business as dividends (a 100 per cent dividend payout ratio).
The market sent Crown higher after the announcement of this new structure because the greater transparency will make it easier to value the various components. The former consolidated structure arguably hides the value of these components.
My colleague, Stephen Wood estimates the value accretion from the restructure at up to 70c per share and values Crown at $14.30 post-restructure — well above its current share price. This is why I’m holding on to Crown in our model portfolio.
Crown’s traditional share-price premium to our view of what the business was actually worth evaporated in 2015 as the Macau downturn set in and dogged the earnings from Crown’s Macau partner Melco.
This deterioration was compounded by increased debt leverage (60 per cent net debt to equity) to fund an ambitious $3 billion development pipeline including Sydney’s Barangaroo project. The market was deterred by project funding pressures on cashflow and slippages in the opening date for Sydney.
But the former share-price premium reflected the high quality of the domestic business, which has some of the best casino assets in the world owing to legislated monopolies in Melbourne and Perth, and exclusive VIP gaming licences for Crown Sydney once it opens in 2020.
These casino properties capitalise on surging inbound tourism from Asia, especially China. In 2015, Chinese tourist numbers increased by 20 per cent and their expenditure increased by 45 per cent to over $8bn. Under the current structure the market values Crown’s Australian operations at a discount to competitors Star Entertainment and Sky City but once the property assets and international operations are housed elsewhere the Australian operations as a stand-alone should attract a premium once more. The 100 per cent fully franked dividend payout ratio (previously 65 per cent) lifts the dividend from 52c to 70c.
The announcement also deals with an issue of concern to some fund managers: Packer’s pay packet.
There was speculation he would be paid $10 million a year but under a proposed services agreement he will not be engaged as a senior executive and no salary will be paid.
His returns from the restructure are restricted to the uplift in shareholder value we explain above… and that is an attractive alignment of interests.
Written by David Walker, with insights from Stephen Wood, Senior Analysts.
Clime Asset Management owns shares CWN on behalf of various mandates for which it acts as investment manager.