James Packer’s Crown Resorts starts to run out of market luck

UBS Securities has trimmed its price target for Crown Resorts by more than 10 per cent.

UBS Securities has trimmed its price target for Crown Resorts by more than 10 per cent, joining a rush of brokerages turning conservative on the company.

The move by the brokerage adds to a rocky start to the year for the casino operator.

UBS, which cut its 12-month target to $17.90 a share, joined Deutsche Bank and Bank of America Merrill Lynch, which scaled back their price targets on Crown earlier this month.

Crown shares closed at $12.30 yesterday, down nearly a third from their 2014 peak of $18.22.

One reason behind Crown’s decline in the past year has been the weakness in the Macau gambling market. Despite operating two casinos in Australia and holding several investments in the US market, Crown is heavily dependent on earnings at its Macau joint venture, Melco Crown.

Macau’s booming gambling scene was built on the back of customers from mainland China, but a slowing Chinese economy and a continuing anti-corruption campaign by Beijing have hurt the market. In 2014, Macau’s casinos recorded their first fall in revenue in 11 years.

UBS said it was cutting Crown’s price target to reflect the weaker outlook for the Macau joint venture, which will weigh on earnings. UBS analysts are forecasting a 5 per cent fall in 2015 revenue, despite an expected pick-up in the second half.

Deutsche Bank has also reduced its 2015 earnings forecast for the casino operator but both banks maintained their buy ­rating on the stock.

The weakness in earnings comes at a time when Crown — controlled by billionaire James Packer — is in the midst of an ambitious expansion drive. Between 2015 and 2019, Crown has committed to $3 billion in investment, peaking in 2016.

This includes developments in Perth, Sydney, Melbourne, Macau and Las Vegas. Crown is also fighting against rival Echo to build a new casino in Brisbane, and may have developments in the pipeline in Japan and Sri Lanka, although the latter is under a cloud after the election of a new president.

Ratings agency Moody’s last week warned that declining revenue in Macau had negative implications for Melco Crown’s credit rating, although it stopped short of a downgrade.

Melco Crown last week applied to delist from the Hong Kong Stock Exchange, citing limited fundraising opportunities and onerous compliance costs, although it will maintain its primary listing on the Nasdaq exchange in the US.

Moody’s kept its Ba3 rating on Crown, while Fitch and S&P both have a BBB rating on the company — two notches above sub-investment grade.

Some analysts believe the risks are being overstated. Last week, Morgan Stanley raised its price target on Crown to $17 a share. The fundamentals in Macau remained strong, Morgan Stanley analysts said. They also noted Crown shares were trading at a discount to peers.

Crown also had flexibility in funding its capex requirements — especially by raising hybrid debt, cutting dividends or by introducing joint venture partners in key projects, Morgan Stanley said in a research note.