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Morningstar | Sydney Is Crown’s Ace in the Hole, Shares Meaningfully Undervalued at Current Price

The recent S&P/ASX 200 sell-off has provided investors an opportunity to invest in Crown Resorts at a meaningful 21% discount to our AUD 15.00 fair value estimate. With a superior location and high-end focus, we believe Crown is likely to steal just over half of Star Sydney's VIP, and around 22% of the domestic table revenue, while at the same time growing the domestic market. Crown group's operations are of high quality, boasts a narrow economic moat rating, and has above-peer earnings growth prospects, and a formidable management team, all of which can be accessed for what we believe is an attractive price. We believe the market is underestimating the value of the pending Sydney casino.

We have trimmed our near-term earnings estimates slightly (around 2% on average during fiscal 2019-2021) to reflect softness in Melbourne’s main gaming floor and slowing VIP growth, both of which we believe are temporary. Notwithstanding, our valuation and long-term thesis are unchanged. Our valuation implies fiscal 2019 P/E and EV/EBITDA multiples of 24 and 11, respectively. In our opinion, these premium multiples are justified given the company's long-term earnings prospects. We project EPS growth of around 12% on average during the next five years to fiscal 2023, although most of the growth is skewed to post-fiscal 2021 when Sydney opens. Additionally, at current levels, the stock offers a solid 5% partially franked dividend yield.

We are excited about the pending earnings uplift when the new Sydney casino opens in fiscal 2022. The new facility, along with the core Melbourne property, are well placed to benefit from strong inbound tourism growth, particularly from China and other Asian countries, a tailwind we expect to see for many years to come. Chinese tourists to Australia have grown at almost 20% per year during the past five years, driven by perceived safety relative to other destinations, pristine nature, and a low Australian dollar. The outlook remains positive and we expect double-digit growth to continue, along with increasing spend per visitor, reflecting the expanding Chinese middle class. Additionally, while not only taking share from rival Star Entertainment, we believe the allure of a brand-new premium-focused facility will help grow Australia's share of the global VIP market from the current negligible 4% to approximately 6%.

We expect Crown will dominate the local VIP market despite Star's stellar VIP growth in recent years. In our base case, we assume Crown captures around one third of the Sydney market in fiscal 2022 (its first full year of operations), with the company continuing to gain share, reaching approximately 55% by fiscal 2024, following a three-year ramp-up period. While Star Sydney is undergoing an expansion of its premium Sovereign Resort and adding approximately 50% table capacity to the premium room to help it fight against Crown, we believe it is too little too late, and Crown will come out on top. We maintain our view that over the long run, Crown should outperform Star in the Sydney VIP market due to its superior location, premium focus, and its brand-new facilities. (See recently published report ‘Is Sydney Casino Crown's Ace in the Hole?’ published on Dec. 14 2018, for further details)

In addition to pursuing Star's top-tier VIP customers, we expect a meaningful portion of the domestic players will also be in Crown's sights. As at fiscal 2018, Star in Sydney generated AUD 668 million in revenue from its domestic tables, and we estimate around 30% of this was in the premium member-only Sovereign room. In terms of average member turnover and quality, we view this facility as broadly on par with Crown Melbourne's Mahogany room. These top-tier (excluding VIP) domestic table clients are likely targets for Crown. We estimate this portion of the market to generate annual revenue and EBITDA of around 223 million and AUD 72 million, respectively, for Crown by fiscal 2024. We estimate by fiscal 2024, Crown will take around 55% of the Sydney premium gaming market (equivalent to around 22% share of the total domestic table market), most of which will come from Star's platinum membership base.