Star and Crown: corona kills the croupier – for now
The casino giants are traversing the valley of doom, but Brian Han sees an eventual way out.
Even before the coronavirus shutdown several weeks ago, casino operators could see their number was up—for the near term, at any rate.
Crown Resorts (ASX: CWN) went into a trading halt before the 23 March shutdown and its rival Star Entertainment (ASX: SGR) soon followed suit as both houses paused to take in the scale of the coming corona crisis.
As for what the government order would do to the casino operators’ earnings, even the forecasters admitted they were rolling the dice in trying to gauge the impact.
“Adjusting our near-term earnings for the three casino companies is akin to nailing Jell-O to a tree,” says Morningstar analyst Brian Han, referring to the three casino operators under coverage: Crown, Star and New Zealand’s Sky City Entertainment (ASX: SKC).
But famed gaming den of Macau may give some indication of the hit. Macau’s gaming revenue fell 80 per cent in March from the year before, Reuters says. It fell 88 per cent in February when authorities suspended casino operation for two weeks. Analysts expect April’s numbers to show an even sharper drop.
Indeed, the pandemic has crippled gaming houses across the world. The S&P 500 casinos and gaming index has lost 51 per cent this year, more than double the 24 per cent dip in the S&P 500.
Despite the carnage, Crown and Star are both five-star stocks and have solid balance sheets, which, Han says, is the immediate focus.
Star Entertainment, Crown Resorts, Sky City - one month
Like many companies, Star has been forced to stand down staff. Up to 90 per cent of its 9000-strong workforce, including senior management, have been made idle. Star says it is providing two weeks of paid pandemic leave and workers will also have access to annual and long service leave entitlements.
Han has cut his fair value estimate on Star Entertainment by 13 per cent to $3.90 per share. Star is trading at a discount of about 48 per cent. Crown is at a 40 per cent discount.
And despite the near-term ugliness, Han is buoyed by the amount of cash Star—and Crown for that matter—has in the bank and expects a return to normality in October this year.
“We see Star as sufficiently capitalised to weather the storm, especially with $480 million in cash or undrawn committed debt facilities as at March 24, 2020,” he says.
As for the fair value estimate downgrade, Han attributes roughly half of it to March 23 shutdown of the group’s gaming and hospitality sites. And its hotel activities have also suffered amid worldwide travel bans.
'Beyond the valley of doom'
Hans tips the hiatus will last until October this year, which has cut his earnings forecasts for fiscal 2020 and 2021 by more than 50 per cent.
But it’s worth remembering, he says, that Star has casinos in three of Australia’s biggest cities— Sydney, Brisbane and the Gold Coast—and is poised to benefit from China’s growing middle class.
“Critically, we are prepared to look beyond the valley of doom and see Star’s EBITDA base rising back towards the $700 million mark in five years’ time.”
Han’s fair value downgrade also takes into account cuts to longer-term earnings forecasts, which have fallen because of changes to capital expenditure and investments in the wake of the virus.
While the virus is the immediate threat, a more tangible and long-term threat is Crown and its new development in Sydney’s harbour precinct of Barangaroo, which was initially set to open next year.
However, Han maintains there is still considerable upside to the current earnings base. Improved cash flow and a solid balance sheet are good signs as is the fact that heavyweight partners have been lined up to share the burden in developing the $2 billion Queen’s Wharf integrated casino-hotel project in Brisbane, which is set to open in 2022.