In the spirit of the season of goodwill, Crown Resorts escorted analysts around its spectacular Sydney property at Barangaroo. The surprise factor was the potential for an earlier than expected opening date, more initial gaming than anticipated and potential for gaming capacity increases over time.
Almost ten years ago when CWN held a 10% stake in Echo Entertainment (now Star Entertainment), CWN revealed its aspirations to build a 6-star hotel and casino at the new Barangaroo development on Sydney’s famous waterfront. The idea was controversial as Echo held an exclusive casino licence in Sydney and obviously did not welcome the competition. But an iconic property development in his native Sydney was the gleam in James Packer’s eye and so began a decade long effort to get to today’s landmark property. But it was certainly not the journey that Mr. Packer might have imagined.
Instead, after a horrendous year of regulatory flagellation (and counting) across the whole group, an almost complete change of management and Board, and the pandemic to boot, CWN is finally at the point where it can see the property opening fully, as it progressively rolls out next year.
It is not quite that straightforward as there is the small matter of sign-off from the NSW regulator (ILGA) that could allow CWN to open its main gaming floor of the casino on 1 February 2022 – about two months ahead of the previous date.
The analyst tour also revealed two further presents under the tree concerning the capacity of its gaming operations. CWN has already hired and trained around 420 staff directly involved in the gaming operations that could commence with a total table count of 160, up from the 140 we previously thought. This will be split 130 on the podium level (Mahogany and Crystal rooms) and 30 VIP tables in the Sky Gaming salons, atop the 275 metre tower. There will also be about 70 electronic gaming tables. The hotel will have 349 keys and a spa below the swanky pads of 76 luxury residences.
The non-gaming facilities include 13 restaurants and bars, a ballroom, event space and outdoor function area and 3 luxury retail outlets.
The second surprise on the gaming news was the potential for future capacity expansion over time. The current gaming scope represents only 20% of the property’s total 20k sqm of gross floor area and management indicated that at present, the combined gaming and non-gaming facilities are only utilising about half the capacity potential. Given there are no regulatory caps on table capacity, this suggests real potential for future earnings growth in Sydney.
After descending from the rarified heights of the luxury apartment tour, the reality of CWN’s current predicament did not take long to resurface. Blackstone’s latest $12.50/share bid sits tantalisingly in front of the major shareholder and the fate of this 37% stake is unknown. We do, however, share CWN’s view of the bid as opportunistic but we acknowledge the Board’s decision to grant due diligence access to Blackstone. It may yet lead to a further revised offer which may or may not secure Board approval.
The Board itself is almost a clean sweep. Only Jane Halton from the days prior to the first major regulatory inquiry (in NSW) still sits on the Board and even she is a relative newcomer to CWN having been appointed in 2018. The rest of the Board has barely had time to find the Board room having all been appointed in 2021 and with one further director (Anne Ward) still pending official appointment.
CWN’s management team is just as green with CEO Steve McCann thrust into the role in October 2021. Importantly, he is also the CEO of Crown Melbourne. The other 10 executives are all new and in several cases are assuming brand new roles within CWN. Investors will not be surprised to learn that these new roles focus heavily on the people, culture, compliance, regulatory and transformation aspects that are well underway at CWN. All of the old executive has left.
Unsurprisingly, many of these new functions are adding significant corporate cost as they are administrative in nature. CWN said it expects corporate costs to be higher than last year at around $130 million for FY22f.
Without passing judgment on the Board and management, this aspect certainly carries some risk to the company until each can prove their worth.
On the regulatory front, CWN is expecting the Perth Royal Commission to deliver its final report by 4 March 2022.
CWN provided a brief trading update that showed Crown Melbourne is slowly emerging from various restrictions and while weekend activity is good, mid-week is not while the CBD remains quiet. Crown Perth revenue on the main gaming floor is down 8% on the same year-to-date period as last year but non-gaming revenue is up 31%. Non-gaming operations in
Sydney opened in October 2021 and while average occupancy in the hotel is only around 40%, the average room rate achieved is about double the Sydney average. Demand for the food and beverage facilities is very strong with average spend exceeding expectations. CWN said limited domestic and international travel is likely impacting performance, but this is yet another angle that is under-appreciated at the property.
Investment view
The Sydney property visit has stimulated our thinking on the potential of the business. There is clearly plenty of upside in earnings that the share price is not factoring yet.
But more immediately, it should give the Board and shareholders more pause for thought towards Blackstone’s approach.
The regulatory news is now reasonably understood by the market and while the impositions and oversight is akin to having a parole officer, the changes were necessary.
With the pandemic receding, domestic and international travel slowly awakening, and the economy in reasonably good shape, there are reasons to be optimistic about CWN’s prospects regardless of the takeover offer.
We retain our Buy recommendation.
