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Forecasted Financial Statement & Valuation- Crown Resorts

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Executive Summary

Purpose of the report

The purpose of the report is to estimate and forecast the financial statements of Crown Resorts
using its historical performances to find the fair and intrinsic value of the company using
valuation methods. This financial estimation will add to the estimation of the company which
will help the investors to make informed decisions about their investments in the particular
company.

Methodology

To derive to the stated recommendations, the financials statement forecast have been analysed
and evaluated using the historical financial performance and the future economic outlook. The
financial forecast have been estimated fro period of three years 2020 to 2022 using the historical
performances of financial year 207-2019. The estimated cash flows is used to find the true
intrinsic value of the company using the discounted rate.

Findings and conclusion

Crown Resorts over the past couple of years have experiences sharp dip in its revenues owing to
a change in the consumer spending pattern which and negative economic situation. The company
in its estimation is expected to grow at a negative rate owing to the pandemic situation. The
company financial and valuation however finds that the company which is trading at a level of
AUD 9.49 has an upside potential of AUD 26% with its true value to be around AUD 12.03.
This highlight the current undervaluation in the company’s listed prices and the stock provide an
opportunity for the long term investors to generate high positive returns from their investments.
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Table of Contents
Introduction......................................................................................................................................1

Company Overview.........................................................................................................................1

Income Statement............................................................................................................................2

Balance Sheet...................................................................................................................................4

Valuation of Crown Resorts............................................................................................................4

Recommendation.............................................................................................................................6

References........................................................................................................................................7

Appendices......................................................................................................................................8

Appendix 1- Forecasted Income statements................................................................................8

Appendix 2- Forecasted Balance Sheet.......................................................................................9

Appendix 3- Calculation of WACC............................................................................................9

Appendix 4 – Valuation of Crown Resorts................................................................................10

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Introduction
The financials of any company is one of the most critical and important factors which determines
the overall efficiency of the operations of the company. A stable and robust financial position of
a company helps the company to sustain itself from its competition in the long run. Financial
assessments of a company's past and historical performances helps in the formulations of future
courses of strategies by which the management and the company can improve its operations.
These evaluations of past performance give much better control over the company’s financial
performances. The paper in general analyses the current financial statements of Crown Resorts
and eventually evaluates and forecasts its future financial statements for the following three
years ie.2020-2020. These estimation of the key financial statements such as Income Statements
and Balance sheet is carried out by analysing the key financial ratios which influences key
matrices of these financial statements. Further the paper with its estimation of the financial
statements, built on to calculate the forecasted free cash flows to the particular company which is
then used to evaluate the fair intrinsic value of the company divided by the current share
outstanding to get is fair market price This valuation of the fair market price will then be
compared with that of the current listed price to comment on the overall nature of the stock
which then influences investors’ decisions. The end of the report contains a recommendation for
the clients and investors of Crown Resorts including the overall analysis of the financial position
based on the estimation, company’s strategies and its performance as compared with companies
operating in the same industry. 

Company Overview
The report presents the current and forecasted financial analysis of Crown Resorts along with its
valuation and comparison to the current market listed price. However there are different factors
which influence the financials of the company including the company’s own operational
efficiency along with the existing and future market and economic conditions and competing
companies, it becomes essential to analyse these factors to make better judgments in the financial
analysis. These factors are directly related to the company’s futures prospects and these must be
studied in detail before making valuations estimates and calculations. Crown Resorts is
Australia’s one of the largest entertainment group, with operations into integrated resorts
containing Luxuries 5 star hotels, gaming parlours and conferences hall of VIP functions across
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different major cities of Australia. In Australia the crown group operates two of the leading
integrated resorts i.e. Crown Melbourne and Crown Perth. The company is one of the single
largest private sector employment generator as it employs close to 18,500 people across different
activities. Crown group also has its upcoming projects which are under construction, which
include Crown Sydney Hotel Resorts and the one at Queensbridge just few kilometres away from
the Crown Melbourne. Crown resorts apart from its operations in Australia also operates Crown
Aspinalls in London, which is one of the hg end casino in the West.. The company has also
stressed its focus on the digital platforms as it possess Bet fair Australian which gives access to
the Australian and New Zealand customers to the leading betting exchange in the world.

Crown Resorts also has a majority stakes in DGN Games and Chill Gaming which stresses on
providing innovative and entertaining online gaming products. One of the most prominent
competitors of the Crown resorts is the Sky city Entertainment group based out of New Zealand,
the company however, is much smaller in its overall operations , provide a fierce competition to
Crown in building its single dominance in the entire Australia and New Zealand. Crown Resorts
for the past couple of years have been registering a negative growth rate in its revenues owing to
change in consumer spending, resulting from the adverse economic condition which restricts
people to spend on luxury. One of the most important reasons which lack the company potential
to grow is the limited accessibility to clients all over the locations across Australia. Further the
negative economic conditions have made things worse for the company from the past year and
this is expected to continue for a year or so owing to the current pandemic situation. The
company however with its strong brand value and presence will be able to sustain its operations
in this unfavourable period generating good future prospects. 

Income Statement
The estimation and forecast of the financial statements determines and evaluates the probability
and prediction of how the business will perform in the future. The estimation of the financials
can be calculated using the key metrics in the financials which determines the overall business
activities (Penman, 2013). Income statement is the most important statement as it analyses the
efficiency of the business activities as this contains information pertaining to the revenues, cost
of goods sold, gross profit, operating profit, net earnings and others. 

Revenues
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 The Revenues is one of the most important factors which reflects the company’s positioning in
the particular industry. Revenues of the company play a critical role in the overall estimation of  
different attributes of the company financials. Crown Holdings limited with its operations of
Luxury Hotels, gaming casino across Australia and in a competitive market condition has been
able to generate a negative growth rate in its revenues for the past couple of years. The
company’s revenues grew at a negative rate of 7%, 8% and 5% in the years 2017, 2018 and 2019
respectively (Crown Resorts, 2017). These revenues for the further years can be estimated using
the aggregate growth rate for the past years. This however do not displays the true value as the
economic environments is different as compared to the past years and a new estimate will help in
determining the true value of the company’s revenues. Another method used in the overall
estimation of the revenues is the estimated growth rate of the overall economy i.e. the gross
domestic product as the companies in general in its mature phase growth at a rate which is
synonym to the growth rate of the local economy in which it operates. The revenues for the
company for the present year 2020 is expected to fall by a rate close to 15% due to the lock down
and partial shutdown of the business activities and limited consumers spending on luxury and
gaming. This is expected to be larger than then that of the expected GDP growth rate for the
following year (Crown Resorts, 2019). However, the company is expected to grow at a rate of -
8% and 2% in the subsequent years, majority of which due to the continued online presence of
the gaming companies and also because the economy is expected to experience a v shaped
recovery from its current level. 

Cost of goods Sold

The cost of goods sold analyses the direct cost associated with the company’s activities and this
is generally deducted from the company revenues to calculate the gross profit margin. The cost
of the goods sold signifies the efficiency of the company’s activities as companies with much
better efficiency generally experience a lower cost of goods sold than its competitors in the same
industry (Kitamori, Sakai, & Sakaji, 2017).The cost of goods sold when compared to the
revenues helps in the evaluation of cost of goods sold as a percentage of the total revenues. The
costs of goods sold for Crown Resorts over the past three averages around 79-82% and this is
expected to remain constant for the following three years as the rising effect of the inflation in
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the cost of the goods will be set off by the increase in the operational efficiency of the company
due to the economies of scale.

Operating Profit Margin

The other factor which helps in the estimation of the income statements is the operating profit
margin as these are calculated by deducting the operating expense from the gross profit margin.
The gross profit margin determines how efficiently a business can generate profits from its
revenues after accounting all its expenses required in the functioning of the business activities
(Lan, 2012). The operating profit margin for Crown Resorts over the past three years are 61.09%
in 2017, 26.61% in 2018 and 21.03% in 2019, the margin has been fairly inconsistent owing to
the major restructure of the business activities in the year 2017. In order to estimate the operating
profit margin, it needs to estimate the operating expenses which include the administrations, and
selling expenses along with other structuring and depreciation costs (Crown Resorts, 2017). The
overall operating costs are estimated to increase by 1.5% for the next couple of years and a
reduction in cost for the third year owing to the improvements in efficiency in the operations
(Appendix 1). Factoring the expenses, the operating profit margin for Crown Resorts is
estimated to be around 22.52 %, 22.87 % and22.78 % respectively. These highlights the stable
nature of the company with sustainable financials.

Balance Sheet 
The forecast and estimation of the balance sheet are done in conjunction with the forecast of
income statements. The estimation of the key matrices in the balance sheet such as inventories,
trade receivable, trade payable, debt and shareholders capital are used in the overall estimation of
the balance sheet. All the items in the balance sheet are generally estimated relative to the
changes in the total revenues compared to its previous years (Fairfield & Yohn, 2001). This
method of estimation of the balance sheet item as a percentage of the revenues is sustainable as
an efficient revenues projection will lead to stable calculations of these key matrices (Appendix
2). The cash figure has been balanced out after calculating the other items of the balance sheet.
Overall the estimation of these three key metrics helps in the forecast of the balance sheet for
Crown Resorts, and it can be analyse that the company is expected to experience a decrease in its
assets and liabilities relative to its revenues for the couple of years owing to the pandemic
situation and global economic slowdown , however the company with its brand name and
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increased focus on the online business segment will be able to sustains its operations and build
on itself as one of the bests attractive spots with extending their locations and presence to
different cities of Australia.

Valuation of Crown Resorts 

The valuation of the business is the process of identifying and evaluating the true fair value of
the company operations and the company future economic value. The fair value of the company
helps the investors and stakeholders in taking informed decisions pertaining to the particular
company. There exists different methods which can be used in the valuation of the business,
these are the discounted cash flow analysis and the free cash flow to the firm (Gallo, 2014). The
discounted cash flow evaluates the intrinsic value of the company’s share price by forecasting
the company’s financial statements and cash flows by discounting them using the weighted
average cost of capital. 

The valuation of Crown Resorts involves various different steps starting from the forecast of the
income statements and the balance sheet. The estimates are based on the forecast of the key
matrices of both these financial statements, which results in the calculation of the Earnings
before interest and taxes (EBIT), which after adjustment of increase in capital expenditure and
increase in the working capital provides the values of the free cash flow to the firm. These free
cash flows to the firm are then discounted using the weighted average cost of capital to get the
present value of the future cash flows for the firm (Kimbro, 2013). There exists certain
assumptions and estimates which are taken for the facilitation of the calculation of the intrinsic
value, such as the terminal growth rate, risk free rate, market risk premium and beta of the stock
of Crown Resorts.

The cost of equity for the particular company is 9.28 % using the risk free rate and the market
risk premium of around 3% and 6% respectively along with a beta of 1.13. The beat of a stock
analyses the volatility of the stock compared to the movements of the market index, and the beta
of 1.13 signifies a moderate degree of volatility of the stocks relative to the changes in the
market. The cost of debt on the other hand is calculated by dividing the interest paid with the
existing debt and this calculates to be 2.5% (Appendix 3). The cost of debt is low for Crown
resorts is because of its less dependence of company finances on debt. The cost of debt and
equity along with their proportion in the capital structure, can be used in the valuation of the
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WACC, which in this case is 8.27% (Frank, & Shen, 2016). The net present value (NPV) for
Crown Resorts using the discounted factor of 8.27% is AUD 121.56 million which when added
to the present terminal value results in the enterprise value of AUD 8150.91 million. This
calculation of Enterprise value when divided by the current outstanding shares i.e.677.16 million,
results in an intrinsic value per share of AUD 12.03(Appendix 4). This intrinsic value as
compared to the current listed price of 9.49has an upside potential of 26.84%, which implies that
the stock is undervalued. However, with several assumptions and estimations it becomes
important to evaluate the effectiveness of the assumptions and the results of the valuation model
by performing sensitivity analysis. 

Recommendation
The financial analysis of Crown Resorts limited includes the forecasts of the financial statements
using key matrices along with calculation of the discounting rates which is used in the
discounting of the free cash flow to the firm to derive at the net present value and the enterprise
value of the firm. The overall analysis helps in evaluating the financial stability and financial
health of the company in relation to the existing market conditions. Crown Resorts have been
experiencing a negative growth rate from the past three years owing to unfavourable market
condition and lower consumer spending and it is expected to give further negative growth in the
revenues owing to the pandemic situation and the changes in the consumer spending patterns.
Taking into all these considerations and certain assumptions, the share price of the company
calculated to be around AUD 12.03 then compared to the existing price of AUD 9.49, which
indicates that the stock is undervalued and has an upside potential of 26.84 %.

It can be evaluated that there are other factors which are associated with the sustainability of the
company apart from its financial performance. These include the presence of the company over
different parts of the county and a strong brand value. Crown Resorts being one of the oldest and
the most luxury hotels in Australia has a good brand value and a significant presence over
different cities is Australia, however the concern for the company is the change in the consumer
spending pattern despite of the increased footfalls in their hotels and resort premises.. Overall in
conclusion it can be said that the company is expected to witness a growth in its revenues, and
the current undervalued nature of the stock provides an opportunity for the long term investors to
generate high positive returns from their investments in the long run. 
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References
Frank, M. Z., & Shen, T. (2016). Investment and the weighted average cost of capital. Journal of
Financial Economics, 119(2), 300-315.

Gallo, A. (2014). A refresher on net present value. Harvard Business Review, 19.

Lan, J. (2012). 16 Financial Ratios for Analysing a Company’s Strengths and Weaknesses.
American Association of Individual Investors Journal.

Crown Resorts Limited (2017). Annual Report 2017. Retrieved from:

https://www.crownresorts.com.au/CrownResorts/files/9d/9df41ad5-de12-465c-ad18-
2925ad3533fa.pdf

Crown Resorts Limited (2018). Annual Report 2018. Retrieved from:

https://www.crownresorts.com.au/CrownResorts/files/77/773dddd5-bd54-45a8-8797-
6fb6038b996a.pdf

Crown Resorts Limited (2019). Annual Report 2019. Retrieved from:

https://www.crownresorts.com.au/CrownResorts/files/a4/a4b1a3d1-62d0-46be-9f29-
3e0020031fcf.pdf

Crown Resorts Limited (2020). Our Business. Retrieved from:

https://www.crownresorts.com.au/About-Us/Our-Businesses

Penman, S. H. (2013). Financial statement analysis and security valuation. New York: McGraw-
Hill.

Kimbro, M. B. (2013). Integrating Sustainability in Capital Budgeting Decisions. In Corporate

Sustainability (pp. 103-114). Springer, Berlin, Heidelberg.

Kitamori, S., Sakai, H., & Sakaji, H. (2017, November). Extraction of sentences concerning
business performance forecast and economic forecast from summaries of financial statements by
deep learning. In 2017 IEEE Symposium Series on Computational Intelligence (SSCI) (pp. 1-7).
IEEE.

Fairfield, P. M., & Yohn, T. L. (2001). Using asset turnover and profit margin to forecast
changes in profitability. Review of Accounting Studies, 6(4), 371-385.
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Appendices
Appendix 1- Forecasted Income statements
PROFIT & LOSS STATEMENT( in AUD Million) FY17 FY18 FY19 FY20E FY21E FY22E
TOTAL SALES REVENUE 3344.14 3083.10 2929.20 2489.82 2290.63 2336.45
Growth (YOY) -0.08 -0.05 -0.15 -0.08 0.02
Other operating income 0.00 0.00 0.00 0.00 0.00 0.00
Cost of goods sold 2737.84 2485.20 2280.00 1991.86 1832.51 1869.16
Gross Profit 606.30 597.90 649.20 497.96 458.13 467.29
Gross Margin 18.13% 19.39% 22.16% 20.00% 20.00% 20.00%
Opeating Expenses 55.65 63.50 46.80 37.35 34.36 35.05
Unsual Income/Expense -1492.33 -285.90 -13.50 -100.00 -100.00 -100.00
Operating profit 2042.98 820.30 615.90 560.62 523.77 532.24
Margin 61.09% 26.61% 21.03% 22.52% 22.87% 22.78%
Growth (YOY) -0.60 -0.25 -0.09 -0.07 0.02
Interest Expense 111.20 76.10 36.60 49.80 45.81 46.73
Interest Coverage Ratio 3.33% 2.47% 1.25% 2.00% 2.00% 2.00%
Interest to Sales
Profit before Tax 1931.78 744.20 579.30 510.82 477.95 485.51
Margin 57.77% 24.14% 19.78% 20.52% 20.87% 20.78%
Growth (YOY) -61.48% -22.16% -11.82% -6.43% 1.58%
Adjusted Provision for tax 106.81 171.00 176.40 153.25 143.39 145.65
Tax to sales 3.19% 5.55% 6.02% 6.15% 6.26% 6.23%
Profit after taxes 1824.97 573.20 402.90 357.57 334.57 339.86
Margin 54.57% 18.59% 13.75% 14.36% 14.61% 14.55%
Growth (YOY) -68.59% -29.71% -11.25% -6.43% 1.58%
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Appendix 2- Forecasted Balance Sheet

BALANCE SHEET ( in AUD Million) FY17 FY18 FY19 FY20E FY21E FY22E
Property Plant & Equipment 3959.2 3880.7 4259 3620.15 3330.54 3397.15
Intangible Assets 1660 1543.4 1479.3 1257.41 1156.81 1179.95
Other non current Assets 874.6 671.4 610.5 518.93 477.41 486.96
Total Non-Current Assets 6493.8 6095.5 6348.8 5396.48 4964.76 5064.06

Current Investments
Inventories 17.5 17.3 16.7 14.20 13.06 13.32
AcccounT Receivable 225.3 172.3 98.7 83.90 77.18 78.73
Cash and bank 1771.2 1844.6 1126 957.10 880.53 898.14
Other current assets 44.8 42 43.6 37.06 34.10 34.78
Total Current Assets 2058.8 2076.2 1285 1092.25 1004.87 1024.97

TOTAL ASSETS 8552.6 8171.7 7633.8 6488.73 5969.63 6089.02

Reserves -5 -76.2 1.4 1.19 1.09 1.12
Contibuted Equity -53.2 -71.9 -203.3 -172.81 -158.98 -162.16
Retained Earnings 5177.9 5306 5298.8 4503.98 4143.66 4226.53
Total Equity 5119.7 5157.9 5096.9 4332.37 3985.78 4065.49

Secured Loan 1594.9 1467 791 672.35 618.56 630.93

Deffered Assets/Liabilities 377.4 380.9 401.5 341.28 313.97 320.25
Other long term Liabilities 274 287.6 255.1 216.84 199.49 203.48
Long term provision 54.5 34.7 28.7 24.40 22.44 22.89
Total Non-Current Liabilities 2300.8 2170.2 1476.3 1254.86 1154.47 1177.56

Trade Payable 453 427.5 433.1 368.14 338.68 345.46

Other current laibilities 118.2 165.3 153.9 130.82 120.35 122.76
Short term Borrowings 350.1 25.7 287.6 244.46 224.90 229.40
Short Term Provision 210.8 225.1 186 158.10 145.45 148.36
Total Current Liabilities 1132.1 843.6 1060.6 901.51 829.39 845.98

TOTAL LIABILITIES & SHAREHOLDERS FUND 8552.6 8171.7 7633.8 6488.73 5969.63 6089.02

Appendix 3- Calculation of WACC

Calculation of WACC WACC Particulars As per B/S
Risk free rate 3% Equity 5096.9
Risk premium 6% Debt 791
Beta 1.13 Debt/(Equity+debt) 13.43%
Equity/(Debt+Equity) 86.57%
Cost of equity 9.28%
Cost of debt 2.50% WACC 8.27%
Terminal Growth rate 3%
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Appendix 4 – Valuation of Crown Resorts

Particulars FY17 FY18 FY19 FY20E FY21E FY22E
EBIT 820.30 615.90 560.62 523.77 532.24
Taxes 246.09 184.77 168.18501 157.1302092 159.6728134
NOPLAT 574.21 431.13 392.43 366.64 372.57
Increase/Decrease in capital expenditure -78.5 378.3 -638.85 -289.612 66.61076
Increase in working capital -78.7 -68.6 -82.275 -37.298 8.57854
Cash flow 417.01 740.83 -328.69 39.73 447.76
Add: Depreciation 0 0 0

Year FY 20 FY21 FY22

FCFF -328.69 39.73 447.76
Terminal Value 7995.152661
PV of Cah Flows -328.69 36.69267092 8442.911859
Net Present Value 121.56
Enterprise Value 8150.91
Debt
Equity
No of shares Outstanding 677.16
Value per share 12.036906
Current market price 9.490000
Upside/Downside 26.84%