Crown Resorts: Is It Time for Investors to Abandon the Sinking Ship?

Article by : Helen Dec 14, 2020

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Crown Resorts, one of Australia largest casino operators and entertainment groups, is hardly living through its best times. Even though its Crown Metropol in Melbourne was finally allowed to reopen on December 1, following the authorities’ decision to ease down a severe lockdown in Victoria state, the numbers don’t lie.
The group’s annual report for the 2020 financial year (ending 30 June 2020) was underwhelming, to say the least, and the company remains in the middle of a corruption and money-laundering scandal involving working with Chinese middlemen who have gang ties. Could it be the right time for the Crown Resorts’ investors to flee? Crown’s financial results are down across the board. Its EBITDA (Earnings before interest, taxes, depreciation, and amortization) declined by 40.6%; the actual revenue is down by 25.7%. At the same time, the corporate expenses went up by $23.2 million, and the company’s net debt is at $891 million.

However, underwhelming financial performance is hardly Crown Resorts’ biggest problem. Perhaps the biggest red flag for its investors out there is Crown Resorts’ involvement in a money-laundering scandal. It was brought to the public’s attention in 2019 in an episode of 60 Minutes title Crown Unmasked. However, the accusations themselves weren’t anything new – it was Four Corners’ investigation in 2014 that revealed the casino operator worked with junket operators in mainland China who were linked to organized crime. The junket operators – middlemen, in other words – facilitated Chinese VIP gamblers to come to Australia to gamble in James Packer’s Crown Casinos.

Despite the accusations, the 2014 scandal blew over without any substantial consequences for Crown Resorts – it kept doing business as usual. However, in 2019, the company wasn’t that lucky.

The 60 Minutes episode in 2019 brought to the public’s eye the evidence for the Crown’s involvement with business partners tied to drug and sex trafficking organized crime, as well as its money laundering activities and corruption ties to the Department of Home Affairs to speed up short-term visas’ approval. Since that bombshell episode, the New South Wales Independent Liquor and Gaming Authority ordered the Crown Resorts to put off the opening of its new Barangaroo Crown Sydney Hotel Resort casino complex in Sydney worth $2.4 billion that was scheduled on December 14. The reasoning behind the decision is the regulator’s desire to see the results of the official inquiry into the casino’s activities. It is expected to be completed in February 2021.

Based on the results of the inquiry, gaming regulators have stated they might revoke the Crown Resorts’ casino license. So far, the inquiry’s recent development was the assisting counsel’s recommendation to find the company no longer suitable to hold a casino license in New South Wales. The main reason stated in the recommendation is the overwhelming influence of its largest shareholder, James Packer, over the casino operator’s activities. To add insult to injury, Moody’s Investors Service has recently downgraded the casino operator’s rating from Baa3 to Baa2 – another sign for investors things aren’t going great at Crown Resorts.

Furthermore, the overall Australian authorities’ response to the COVID-19 pandemic remains overly cautious and somewhat erratic. The country has been weathering the storm extremely well (having reported only 27,923 total cases during the whole pandemic) compared to other states. However, despite that, its South Australia state is only about to reemerge from a strict lockdown (that also meant casinos were capped at 100 visitors capacity) on December 7. The lockdown was introduced following several dozen new infection cases.