VIP Pressure

Crown Resorts (CWN) reported an FY17 normalised net profit of $343 million, down 15.5% on last year. The profit result was below Ord Minnett’s forecast as a result of VIP weakness, although positive CrownBet earnings before interest and tax (EBIT) and lower corporate costs were highlights.


We have reduced our EPS forecasts by 11.9% in FY18 and 19.4% in FY19. We maintain our Buy recommendation, but have lowered our target price to $13.70 from $14.00.


Crown’s focus on Australian earnings was reflected in its higher tax rate of about 30%, which we estimate will have a 10.3% impact on FY18 earnings. In the wagering and online division, FY17 revenue growth of 32% on last year and a $6 million lift in EBIT in the second half of FY17 showcased the impact of a compelling loyalty program on the wagering market. Downside catalysts appear to be delayed and with a base-case CY19 point of consumption ruling, we forecast a $55 million operating profit contribution in FY18.


FY17 corporate costs declined 52% on a year ago to $47 million, versus guidance for about $60 million and our forecast of $63 million. Operating expenditure as a percentage of sales reached 10-year highs for the Australian resorts in the second half due to operating deleverage. We forecast a reduction in FY18 and beyond as cost savings are realised and revenue moderates.


A further share buyback program of 29.3m shares is to be implemented in the first half of FY18, increasing our FY19 EPS estimate by about 3%.


The decline in VIP business was worse than expected, but was offset by cost savings, wagering and capital management. We expect commission play to increase due to Crown’s exit from the Asian market, which should mitigate risk.


Uncertainty around Crown’s corporate strategy has persisted since October 2016, but we believe cost savings, share buybacks and debt capacity will allow it to undertake significant changes. Our increased confidence in management to focus on shareholder returns and domestic growth provides valuation support.

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