Tag: Australian Market
Business Strategy and Outlook:
Domain offers exposure to favourable trends in the Australian real estate market, but with relatively low exposure to real estate price risk in the long term. The company has generated strong revenue growth in recent years, boosted by an increase in agents using its website, listings, premium listings, and acquisitions. However, we don’t expect similar growth from these factors in future, as we believe Domain now has near saturation of available agents and listings, and we don’t forecast further acquisitions
Domain can generate above-inflation growth in revenue per listing, as a result of above-inflation listing price growth and an increase in the proportion of premium listings on its website, from around 10% national penetration toward REA Group’s 20%. A revenue CAGR for the group of 12% over the next decade is expected. Domain benefits from a capital-light business model that should enable strong cash conversion and relatively low financial leverage. In addition, Domain has a business mix that includes print-related revenue, which is in structural decline, and which we suspect is a relatively low-margin business. Domain’s joint ventures with real estate agents also mean it will effectively achieve relatively low prices for its premium listings. Domain also has below-market-price service agreements with Fairfax that are likely to increase costs over the next few years.
Financial Strength:
Domain is in good financial health, which is in part due to the capital-light business model and expected cash flow strength. As with many software companies, most of Domain’s costs relate to employee costs, and the company does not require large capital expenditures to grow. The lack of capital requirements means cash conversion is usually high and cash flows are available for dividend payments and growth investments, such as acquisitions or investments in early-stage businesses. It also means that equity issuance is usually negligible, which means little or no dilution of existing shareholders. The coronavirus-related economic downturn will affect debt metrics in 2020, but Domain has negotiated a waiver of covenants to the end of the calendar year, by which time we expect the business to be recovering.
Bulls Say:
- Domain is expected to generate high revenue growth, primarily owing to an increase in revenue per listing as a result of an increase in premium listings.
- Domain should benefit from Australian population growth of around 1%-2%, which should equate to a similar increase in dwelling numbers and therefore listings.
- Domain’s diversification into real estate-related businesses, such as mortgage, insurance, and utility services, is likely to strengthen the firm’s competitive position by increasing switching costs, and could diversify earnings.
Company Profile:
Domain is an Australian real estate services business that owns real estate listings websites and print magazines, and provides real estate-related services. Domain was formed as a home and lifestyle section of newspapers owned by Fairfax Media Limited (ASX:FXJ) in 1996, and an associated residential real estate website, www.domain.com.au, was launched in 1999. Domain’s real estate listings website has grown to become its core business and the second-largest residential real estate website in Australia, after REA Group’s (ASX:REA) owned www.realestate.com.au. Newscorp (ASX:NWS) owns 60% of REA Group.
(Source: Morningstar)
General Advice Warning
Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.
Business Strategy and Outlook
Morningstar analyst expect Crown Resorts to deliver strong earnings growth over the next decade, buoyed by the recovery from current coronavirus-induced lows as restrictions ease, the opening of Crown Sydney during calendar 2022 and continued solid performance from the core assets in Melbourne and Perth. Crown Melbourne and Crown Perth underpin the firm’s narrow economic moat. Crown is the sole operator in both jurisdictions, with long-dated licences. These properties have performed strongly, thanks to Crown’s solid track record of reinvestment, resulting in consistently high property quality, stable visitor growth, and earnings resilience. The quality of these assets, particularly Crown Melbourne, has driven strong growth in VIP gaming.
Indeed, the strong performance of Crown Melbourne helped the firm secure the second licence in Sydney to compete with The Star. As per Morningstar analyst view, the New South Wales government only issued the second licence because The Star’s performance significantly lagged Crown Melbourne in both revenue and EBITDA, depriving the state of taxation revenue. The Star Sydney’s EBITDA is roughly 60% of Crown Melbourne’s, despite Sydney being Australia’s largest city and the international gateway into Australia.
Morningstar analyst estimate Crown Sydney will not only take share from incumbent rival The Star, but will also grow the size of local casino gaming market–particularly in VIP. Morningstar analyst estimate VIP gaming will be a negligible share of revenue in fiscal 2022 amid border closures. However, it is expected that the segment to recover as border restrictions ease and tourism recovers. But VIP gaming can be highly volatile, ranging from over 30% of revenue in fiscal 2015 to 17% in fiscal 2017. Morningstar analysts estimate VIP gaming represents less than 20% of revenue at Crown Melbourne, less than 10% of revenue at Crown Perth, and will constitute more than half Crown Sydney’s sales-albeit at a lower margin than table gaming.
Crown Draws Blood From a Blackstone
Morningstar analyst have raised its fair value estimate for narrow-moat Crown by 8% to AUD 12.20 per share after directors supported an increased bid from narrow moat asset manager Blackstone. New York-based Blackstone, already Crown’s second largest shareholder with a stake of 10%, has been pursuing the beleaguered casino since March 2021 with prior bids unable to pique the interest of the Crown board.
Crown had formally rejected Blackstone’s previous bid of AUD 12.35 and the 1% improvement to AUD 12.50 would be unlikely to move the needle-particularly given regulatory uncertainty had eased with the Victorian Royal Commission stopping short of cancelling Crown Melbourne’s licence, instead providing Crown a roadmap to redemption. The AUD 13.10 offer is more compelling, representing a 16% premium to our standalone fair value estimate and a 32% premium to the undisturbed price on Nov. 18, 2021. Crown’s board flagged its unanimous intention to recommend shareholders vote in favour of the proposal, should a formal bid eventuate.
The increased offer is nonbinding and remains conditional on completion of due diligence, support from shareholders, unanimous approval from the board, final approval from Blackstone’s investment committees, and approvals from state gaming regulators. While Blackstone is prepared to proceed while Crown’s various regulatory investigations and consultations remain underway, negative outcomes arising in the meantime (such as the loss or suspension of a casino licence) could thwart the bid.
For the transaction to proceed, support from 37% shareholder Consolidated Press Holdings, or CPH, will be crucial. Via CPH, former executive chair James Packer’s major shareholding remains a headache for regulators. But the Blackstone deal could be seen as taking risk off the table for regulators, given the scrutiny on the relationship between Crown and CPH/James Packer since the commencement of the Bergin casino inquiry. Indeed, the Victorian commissioner’s report has since recommended CPH have until September 2024 to sell down its holding to less than 5%.
Financial Strength
Despite near-term earnings weakness, Crown’s balance sheet remains robust. Debt levels have increased with the construction of the Crown Sydney casino and forced venue closures due to COVID-19. Crown’s net debt/EBITDA peaked at 3.7 in fiscal 2021, from 1.8 as at the end of June 2020, but still below the precarious 5.0 level (the covenant limit on Crown’s subordinated notes). We expect significant deleverage in fiscal 2022, aided by around AUD 450 million in further apartment sales from the Crown Sydney project and earnings recovery. We forecast fiscal 2022 net debt/EBITDA to fall to 0.5, and with an improved balance sheet, expect the firm to reinstate dividends from the second half of fiscal 2022 at around 75% of underlying earnings
Bulls Says
- Long-dated licences to operate the only casino in Melbourne and Perth allow Crown to enjoy positive economic profitability in a regulated environment.
- Crown Sydney provides a long-term growth opportunity to capture share and expand gaming in Australia’s most populous market.
- Crown is well positioned to benefit from the emerging middle and upper class in China.
Company Profile
Crown Resorts is Australia’s largest hotel-casino company. Its flagship property is Crown Melbourne, an integrated complex with more than 2,600 electronic game machines, or EGMs, 540 tables, and three hotels. Crown also operates Crown Perth, a property with more than 2,500 EGMs, 350 tables, and three hotels. Crown has also obtained a licence to operate Sydney’s second casino, Crown Sydney, centred on the VIP and premium gaming market. The company also operates Aspinall’s, a boutique, premium-focussed casino in London.
(Source: Morningstar)
General Advice Warning
Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.
