Odinian Beta

With its Sydney casino closed by regulators and its Melbourne casino closed due to the latest COVID outbreak, there weren’t many surprises in Crown Resort’s (ASX: CWN) full year result.

Revenue has obviously been affected by the various lockdowns, most clearly at its flagship complex in Melbourne, which was closed for most of the first half and then subject to various restrictions during the second.

Its Perth casino was less affected, although there have also been various short lockdowns in Western Australia. However, the hard border policy pursued by the Victorian government has helped Crown in this respect by keeping lockdowns in the state to a minimum.

So it was no surprise revenue fell to $1.54bn, 31% lower than 2020, itself affected by the initial lockdowns when the pandemic first impacted Australian in the second half of 2020.

Normalised EBITDA fell 52%, to $247.1m, with Crown incurring a $261.6m loss once closure costs and significant items such as legal fees and other expenses incurred in relation to the plethora of regulatory investigations into the company are considered.

Unsuitable?

As I have discussed previously, after the Bergin Commission in New South Wales found Crown unsuitable to continue to give effect to the restricted gaming licence at Barangaroo in Sydney, Victoria and Western Australia set up Royal Commissions to investigate Crown’s suitability to continue to hold its Melbourne and Perth casino licences, respectively.

Despite the continuing media hysteria – clearly driven by many journalists’ anti-Packer hostility and hatred of gambling – I think it is remains unlikely that Crown will lose either of its Melbourne or Perth licences.

However, the Crown Board and new CEO Steve McCann (pending probity approvals) have quite sensibly considered the worst case scenario and planned accordingly. They have extended the maturity of the company’s debt facilities, persuaded their bankers to ignore covenant testing at 31 December 2021 and also persuaded their banks to waive certain events of default that would otherwise occur in relation to the cancellation or suspension of the company’s various Australian casino licences.

Consideration is also being given to separating the group’s property assets including its ownership of hotels at Crown Melbourne and Crown Perth and hiving them off into a separate company that would own these properties and lease them back to Crown. Crown would maintain management and operating control of these properties.

Separating the casino from its property assets such as hotels is an increasingly common strategy across the gambling world especially in the United States, driven by very low interest rates which result in rents earned by the property holding company being valued at high multiples by the market.

However, new CEO Steve McCann stressed that such a restructure would only be considered if the relevant regulators required it and/or it was financially necessary to ensure the company survived.

Waiting

The Victorian Royal Commission is due to report its findings and recommendations to the Victorian government by 15 October, while the Western Australia Royal Commission is due to submit its final report by 4 March 2022.

The media is of course being hysterical and baying for blood. In my view, though, the more likely result from both Commissions is that Crown is found presently unsuitable to hold its Melbourne and Perth licences but offered a path back to suitability in due course.

Time will tell whether I am right, though.