Crown Resorts: From bad to worse

Crown Resorts (ASX: CWN)

9 November 2020

We rated Crown Resorts two stars back on 19 October 2020 for two main reasons: the NSW investigation and COVID-19 keeping Australia’s borders on lockdown. One of our biggest issues with the NSW investigation was that it seemed unlikely to be contained just to NSW with Victoria’s regulators seemingly chomping at the bit to get a piece of the action. We thought these investigations were unlikely to go away anytime soon and combined with the issues around the lack of VIP’s able to enter the country to gamble, we believed the stock was not accurately reflecting the risk.  

However, while we were right about the severity and longevity of these inquiries, we were still surprised by the two latest developments to have hit Crown Resorts: an AUSTRAC money laundering investigation and a serious question arising around Crown’s ability to keep its Sydney license. 

On 20 October 2020 the anti-money laundering regulator AUSTRAC accused Crown Resorts of failing to act on suspicious transactions that its Melbourne casino knew were linked to potentially criminal junket operators. It’s unclear what specific penalties or restrictions AUSTRAC will levy on Crown Resorts, which has just made Victoria and NSW regulators more upset. 

More recently on 4 November 2020 the AFR reported that the counsel assisting had delivered a recommendation that Crown Resorts was not suitable to hold an NSW gambling license. We knew that the NSW commission was likely to hit the company with some severe consequences, but we didn’t think it would go so far as to force the sale of Sydney’s Barangaroo casino to another operator. While the final decision lies with the NSW Independent Liquor and Gaming Authority, the recommendation of the counsel assisting has in the past held considerable weight. We believe these new developments are pushing the base case scenario closer to a delay in the casino’s opening. Meanwhile, our opinion is a forfeiture of Crown Resorts NSW licence has gone from “out of the question” to the worst-case scenario. While we certainly believed the market had not adequately priced in the risk of the NSW and Victoria investigations, we strongly believe the market has certainly not priced in the possibility of Crown Resorts losing its NSW casino license. 

Since these two new risks have appeared, the situation has become a lot worse for the company, not better. Even with the pull back in Crown Resorts’ stock since our initial publication we still have held our two-star rating, but now its stronger than ever.

 

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