The casino business, like insurance, can be a little risky.
In addition to regulatory and currency risk, the shareholder also has to deal with inherent volatility in year-to-year earnings.
'The house always wins' goes the old saying, but that's not strictly true.
In offering the potential for jackpots – such as on the pokies – there is an obvious, if small risk that eventually the casino will have to pay out to a lucky punter.
Over the long term the house will take its cut, but in the short term a jackpot or a run of bad luck (yes, really) might see the casino paying out more to punters than is usual.
When the payments are placed on public display (as with company reports) at least twice a year, there is potential for disappointment when investors – who seek ever-growing profits – see that profits have declined compared to a previous period.
That's exactly what has happened to Crown Resorts Ltd (ASX: CWN) over the past six months, but investors have nothing to worry about.
Here are the highlights from Crown's latest half-yearly report:
- Statutory Revenue rose 9.2% to $1,706 million
- Statutory Net profit fell 47.2% to $201 million
It's important to note that Crown feels that 'normalised' results, (which are adjusted to exclude variations from the 'theoretical win rate' and one-off expenses among other things) are a better guide to how the business is performing.
This is true, but there's also no escaping the fact that the win rate (and lower earnings from Macau) has impacted profitability in the first half this year, hence the lower statutory net profit figure.
'Normalised' results are included below (a full definition of normalised results can be found in Crown's release):
- Revenue rose 17.2% to $1,719 million
- Earnings Before Interest, Tax, Depreciation and Amortisation (EBITDA) rose 14.8% to $450 million
- Net profit after tax rose 2.1% to $321 million
- Interim dividend of 18 cents, 50% franked
Largely unmentioned in the report was Crown's agreement with the Victorian government, in which the casino pays huge fees in return for an exemption from the tax on VIP gambling; and the acquisitions of Betfair Australiasia and online gambler BetEasy.
I think both ventures have considerable potential, especially if Crown can lure VIP investors in the quantity it hopes to.
The decline of the Macau casinos is the biggest question mark going forwards, with 'weak market conditions' and a net decline in business activity in the sector (thought to be due to a massive crackdown on corruption) putting a big hole in revenues.
Further there is reportedly a massive wave of new casino development going forward which could thin out Crown's revenues further in future reporting periods.
It's tough to say if Macau will recover rapidly or not, which is problematic since it is a meaningful contributor to earnings.
Despite that however, Crown Resorts continues to look like a long-term growth story at its current price, with earnings potential that should outweigh weakness in Macau.
