Crown Resort Limited Evaluation - Example

Crown resort limited (2016) Table of Contents Introductions 3 Shareholder analysis 4 It is not easy to certain the profile of crown margin ventures, because of concealment surrounding the beneficial ownership of crown’s stock, but it is likely that they are much diversified fund managers who trade the stock held on their behalf in many nominee accounts listed among the companies’ top 20 shareholders. As the nominees entails the substantial part of the companies shareholding, the marginal investors holds substantial part of the stock. As substantial part of the shareholder for crown limited are the marginal invests, many of the company’s shareholders are likely to participate in constant trading activities. They therefore exert substantial impact over the short term stock price. Nevertheless, the transaction average out as time goes by to have a least effect on the long run stock price. Due to numerous official marginal investors, in the long run, the verdict of marginal invest is not specifically important to share price. Non- marginal investor with substantial holdings is probable to impact the long-term price through rare, yet significant, traders[Rog10]. 5 Risk returns analysis 6 Return for financial year 2015/16 7 dividend yeild 8 Cost of capital Analysis 10 Capital asset pricing model (CAPM) 10 Interval of sample 11 Market index 11 Risk-free rate 12 Comparing beta value worked out with the value published by ASX 14 Dividend growth model 15 cost of debt 17 weighted average cost of capital 18 Works Cited 20 Appendices 21 Introductions Crown resorts limited is Australia’s, main gaming as well as entertainment company which had a market capitalization more than $7.5 billion in June 2015. The company was created in 2007 when publishing as well as broadcasting limited stripped its gaming assets to crown limited. PUBLISHING AND BROADCASTING LIMITED was retitled to consolidated media holdings and retained all assets remaining. Crown owns and operates wholly of its two Australia’s leading gaming as well as entertainment complexes. The report provided an overview of the crown limited, the shareholders of the company, the analysis of risk returns as well as the decomposition of weighted average cost of capital for the company[Col05].1 Shareholder analysis Marginal analysis is the most shareholders engaged in buyer or seller in the subsequent stock trade. The margin shareholder will establish the price of stock through force of demand and supply in the market whilst marginal invest on crown resort limited the stock. We will perform an analysis of crown limited in seeking the profile of a marginal investor. crown is an investment is the main shareholder with 100% indirectly owning crown resort limited, which is listed on ASX. crown is 50% owned by consolidated press holding groups which is group of companies owned by packer family. James Douglas packer, chairman of consolidated press holdings, is as well as the board members as well as the non-executive’s director of Melco crown entertainment limited entertainment limited[Wil99].2 The major shareholders of crown limited as at June 2015 were the MECLO international development as well as crowns resorts. Lawrence yau lung ho is the company CEO of crown entertainment. He holds 475 shareholding in crown limited inclusive of the shares through companies owned by person as well as trust affiliated with him. They also have an interest in peer inside ownership corporations like the Vegas sands, as well as the resorts (MGM), and Wynn resorts (Wynn) with insider ownership of about 51%, 20%, and 21%, correspondingly. nevertheless, Caesars entertainment (CZR) has insider ownership of 2%, a better way to reduce the risk of venturing in a single casino business is to upheld the diversified portfolio in the company through EFT’s like the market vector gaming[Gre12].3 It is not easy to certain the profile of crown margin ventures, because of concealment surrounding the beneficial ownership of crown’s stock, but it is likely that they are much diversified fund managers who trade the stock held on their behalf in many nominee accounts listed among the companies’ top 20 shareholders. As the nominees entails the substantial part of the companies shareholding, the marginal investors holds substantial part of the stock. As substantial part of the shareholder for crown limited are the marginal invests, many of the company’s shareholders are likely to participate in constant trading activities. They therefore exert substantial impact over the short term stock price. Nevertheless, the transaction average out as time goes by to have a least effect on the long run stock price. Due to numerous official marginal investors, in the long run, the verdict of marginal invest is not specifically important to share price. Non- marginal investor with substantial holdings is probable to impact the long-term price through rare, yet significant, traders[Rog10].4 Table 1: The 20 largest shareholders as at December 2015: Name No. of Shares % of Issued Capital 1 Consolidated Press Holding Limited 162,113,176 22.26 2 Bareage Pty Limited 158,486,104 21.76 3 HSBC Custody Nominees (Australia) Limited 85,482,152 11.74 4 JP Morgan Nominees Australia Limited 53,771,393 7.38 5 National Nominees Limited 50,890,253 6.99 6 Citicorp Nominees Pty Limited 17,525,130 2.41 7 BNP Paribas Noms Pty Ltd 16,241,941 2.23 8 Cavalane Holdings Pty Ltd 15,250,723 2.09 9 Cairnton Holdings Limited 14,641,045 2.01 10 RBC Investor Services Australia Nominees Pty Ltd 11,626,830 1.60 11 Citicorp Nominees Pty Ltd 11,564,927 1.59 12 Samenic Limited 10,188,370 1.40 13 JP Morgan Nominees Australia Limited 7,655,792 1.05 14 HSBC Custody Nominees (Australia) Limited 6,357,196 0.87 15 BNP Paribas Nominees Pty Ltd 3,530,203 0.48 16 UBS Nominees Pty Ltd 3,513,055 0.48 17 AMP Life Limited 2,818,939 0.39 18 ARGO Investments Limited 2,084,184 0.29 19 Consolidated Press Investments Pty Ltd 2,069,387 0.28 20 UBS Wealth Management Australia Nominees Pty Ltd 1,938,963 0.27 Total 637,749,766 87.56 Others 90,644,419 12.44 Risk returns analysis The report provides a summary of the expected risk and returns of the portfolio of crown limited. The risk and return of the combine portfolio will be appraised by employing the mean variance approach followed by the portfolio appraisal using the capital asset pricing model (CAPM) in making a conclusion on the validation of the chosen data, information of the underlying principles and also the calculated results. the advice we be given with consideration of hypothesis as well as constraint under the two approach and appraising the results of calculation the importance assumption is precisely that shareholders are well diversified in such way that they are just exposed to market risk as well as the firms risk components to reduces nil. In this regards, beta might be employed as an appropriate appraisal of risk for shareholders for crowns limited. The graph of discrete weekly returns for crowns limited[Rog10]. 5 the graph above depict the comparatively high associating between the discrete weekly returns stocks for crown limited as well as the market index stock prices. Appropriate details as well as workings are depicted in the appendixes below. an assessment of the data depict a strong coefficient between the discrete weekly return on stock as well as the discrete weekly change spot price being 0.35, the modest positive correlation between the variables. In making a comparison, the correlation coefficient for the discrete weekly returns on market as well as the spot price is low at 0.124 and thus it is different that the stock price is the main risk exposure for crown limited[Joh08]6 Return for financial year 2015/16 The stock returns for crown limited for the financial year ending 2015 is arrived at by using the following formulae Stock price= {dividend paid+ (final share price-initial share price) total returns/initial share price} The sum of return for the period equals to the yearly dividend yield inclusive of the yearly capital gain or loss on stock. In the appendix below, it can be observed that the closing share price for crown limited and all ordinaries index is $12.46 (31st march 2016) as well as the previous closing price was $12.23. The capital returns realized by the shareholders of crown limited is as follows Capital gain= {final share price — initial share price/initial share price} Capital gain=${12.23/12/46/12/23)=-1.89% The shareholders realized a capital loss of -1.89% for the 2015/16 financial year, as the stock price reduces. The annual report for 2015 implies that the crown limited paid an interim dividend of $0.33 per share on 16th march 2016. Crown resort ltd pays its dividend twice every year. For beta computation, the dividend is deemed to be remunerated at the ex-dividend date since for shareholders and investors to be entitled with dividend; they have to buy the stock prior to the ex-dividend date (ASX 2015)7. The comprehensive dividend compensation over the period of January 2014 to march 2015 can be found in the appendix. Beta for crown resort ltd can be computed by dividing the covariance (σim) of the excess return on stock (ri-rf) and excess return on the market (rm-rf) by the variance (σ2m) of the excess returns on the market. The dividend were fully paid were fully franked at 30% tax rate. The adjustment for franking credits is provided in the appendix below[Rut09]. The interim dividend paid turn to be ($0.16*0.7=$0.112) with a final year dividend paid of $0.33 The dividend yield for annual period is worked out as follows dividend yeild dividend yeild= (interim dividend+finanl dividend/initial share price} dividend yeild=($0.112+0.33)/12.46=2.64% The dividend yield for the period was 2.64%. Thus the total return for the financial year ending 2015 will be Total returns= (dividend yield capital gain total returns= (2.64 %+( 1, 89) =0.75% The all ordinaries index, entailing the Australia’s main 500 corporations by market capitalization as well as accounting for surplus of 98% of ASX’s value is employed as proxy for the market. The initial closing price was 5,151.80, 70.30 (1.38%) 16:40 931st march 2016) and previous closing price at 5081.5 (2nd march 2015). In this regards, the returns on the market might be worked out as follows. Return on market={final index value -initial index value/initial index value} Return on market= (5151.8-5081.5)/5081.5)=0.8338958% In working the holding period stock return for the financial period, it is assumed that the stock as well as index were bought at the start of the financial year as well as not sold before the end of the period. The all ordinaries index depicts a beta of 1.05 which implies that the beta for crown limited is 0.833895. The systematic risk is 0.833895 times as compared to that of the market. In making a comparison, it is important that we undertake an analysis of expected returns on a fairly priced stock with beta of 0.833895. We will employ the capital asset pricing model to work out the security market line[Roy04].8 The performance of financial manager is established by their capacity to raise more finance as well as venture it to create sufficient returns. The assessment of the annual report ending 2015 provided that crown limited experienced a capital expenditure of $2.7 billion. Despite the comparatively capital expenditure, crown limited underperformed comparative to the market. The returns from the capital expenditure items are starting to repay their initial capital investment. The underperformance might imply that the market is incredulous resources for crown limited interim of capacity to create return on capital invested. Nevertheless, it should be understood that many of the underperformance for crown limited was not because of management verdicts, instead, it was owing to incredibility low price of the gaming and entertainment which lead to low anticipation of the stock market analyst. It might be explained that long term vision of crown limited might be held somewhat for the deprived outcome, as its incapacity to diversify the entertainment and gaming turn to be vulnerable to the company’s wide market exposure in gaming and entertainment sector[Ana11].9 Cost of capital Analysis Capital asset pricing model (CAPM) The capital asset pricing model (CAPM), which was developed in the mid 1960's by Sharpe (1964) based on the portfolio theory of Markowitz (1952), is a common model in modern finance as a measure of an asset’s risk. CAPM indicates that the expected return for a security is related to its beta. Beta is a measure of the systematic risk. This risk cannot be reduced and be avoided under any circumstances. In terms of CAPM, beta is simply the covariance of a security’s return with the return from the market portfolio. Their relationship can be normalized by dividing the covariance to the market variance.in part two; beta of crown resort limited will be calculated through CAPM, which is used for computing the expected return of each stock, and also for constructing and finding efficient portfolio combinations[Tho12].   2014 2015 Current-unsecured $80,736,000 $29,087,000 Bank Loans-unsecured $679,000 - Finance Lease-secured $81,394,000 $29,078,000 Non-current-unsecured $331,449,000 $1,295,508,000 Bank Loans-unsecured $1,211,623,000 $370,081,000 Capital Market Debt-unsecured $10,716,000 - Finance Lease-secured $1,553,878,000 $1,665,489,000 Interval of sample The monthly data is considered significant in approximating beta on the basis of CAPM. Employing the monthly data for more than five years will reduce the biasness and creates a more precise overview of the entire venture portfolio. Market index All ordinaries index that id frequently defined as market index as well entail roughly 0.98 of the market capitalization, covers more than 500 stocks. The all ordinaries index rare ignore the dividend paid by not considering the dividend. An s a result all ordinaries index depict the market index The capital asset pricing model is depicted as follows: Where, re is the returns on equity, rf is the risk free rate b is the beta rm is the market returns the assumption of CAPM is that investors are rational and commands higher returns for taking high systematic risk, whilst it is assumed that unsystematic risk is diversified to nil. investors will not be position to have market portfolio s well as risk free assets, which implies therefore that the assumption of asset diversification might not be realistic. the variables of the model have been established to be the 10-year Australian government bond rate will be used as the risk-free rate since, this is deeming to be safe instrument existing to an investor. ASX quotes the rate 3.5% per annum. which is the present bond rate the rate is believed to be same to past bond rate for the period? data which is selected to calculate beta and portfolio expected return are monthly 2-year samples. in order to justify data selection in CAPM part, four factors will be considered and presented: time horizon of sample, interval of sample, risk free rate selection, market index. Risk-free rate For determination of beta of CAPM, the risk-free rate should be firstly determined. Generally, the government bond is always be chosen as assumed zero risk asset when calculating beta and pricing capital. There are many different kinds of bonds, such as 5-year, 10-year, and 30-year. However the 10-year government bond rate is most acceptable because of its less sensitivity to unexpected change in inflation. bowman (2001) also said that “the most commonly used estimation in Australia is based upon the ten-year risk free rate of government bonds, which represents a low risk investment.” therefore, 6.5% government bonds are used as a measure of the risk-free rate in this report[Gre12].10 To provide a beta appropriate to the timeframe, the beta is worked out as depicted in the appendix below to be 0.833895. The beta was worked out by regressing the discrete weekly returns for the stock inclusive of gross dividend payment against the discrete weekly returns for the all ordinaries index. In appreciating the beta in CAPM workings, it is believed that the beta will be constant. Beta (β) is a measure of the sensitivity of the stock price relative to the change in the whole market. it appraises the non-diversifiable risk of a company comparative to the market index .in working out the beta for crown resort ltd, the company monthly historical data since January 2014 to march 2015 are employed since it get rids of sensitivity in the company past data due to effect of global financial crisis in the year 2015/16.a 51 monthly data is collected and considered to be enough to provide a reliable outcome that will depict the beta for crown resort limited[Roy04]. = = Which means that the coefficient a=0, Beta is given by: Where: =the dividend over the holding every 6 months \ = closing price at month t; pt-1 = closing price at month t-1 = index level at month t; it-1 = index level at month t-1 = the return on stock i, earned over period t = the risk-free rate of return = the market rate of return =the number of periods (n = 60 in this case) For crown resort limited: total covariance(x, y) = 0.0024 variance (x) = 0.0025 Beta of crown resort limited = total covariance(x, y) / variance (x) = 0.833895 Comparing beta value worked out with the value published by ASX The beta for crown resort limited is as well as published in the ASX. It can be observed that the beta as displayed in the ASX is 0.833895 for crown resort. The value of beta is diverse from the worked out beta above of 1.67 due to the following factors. The risk free employed by ASX may be diverse in working out the beta; it may be other category of stock that is taken into consideration as close to the risk free rate which is just an assumption. The market index employed by the ASX may be diverse from what is used in the research due to numerous market indexes in Australia other the all ordinaries indexes like the ASX 200 which is diverse in entirety of the corporation listed in the stock market. For all ordinaries indexes, there are more than 500 corporations listed while for ASX 200 merely entail a total of 200 corporations. The ASX may be using dissimilar approach to working out the beta and as a result small changes may be envisaged in the research report and those of the ASX. CAPM model entails two distinct sort of risk; the systematic and unsystematic risk. Unsystematic risk entails the change in price of the stock due to unique event to the stock while systematic risk is value of the stock influenced by the entire market factors. It therefore means that the unsystematic risk can be eliminated by holding portfolio of asset in order to minimize investment risk while systematic risk can be eliminated by sufficient diversified venture and thus some risk premium might be provided for as compensation[Rog10]. 11The beta coefficient is the tool appraisal for the systematic risk of the security that ascertains the risk of a single stock or portfolio of security. Beta coefficient is a regression coefficient that might be worked out from the past data. As a result, the required rate of return on the basis of capital asset pricing model shall be CAPM= {3.5+0.833895(4.46-3.5) =4.5% Dividend growth model The assumption of dividend growth model is that the current stock price is same to the sum of future cash flows discounted back to year one using appropriate discounting rate with shares be equivalent to eternity. The model is very sensitive to the assumptions that the company pays a steady dividend at a constant growth rate. This has been experienced in crown limited since they tend to pay steadily growing dividend each financial year. It assumes therefore that the earning per share steadily precisely in the current time of price volatility in gaming and entertainment industry. The methods employed consequently assume that the proportion of earning per share multiplied by the return on equity is in a position to approximate the long run dividend growth rate[Roy04].12 The dividend growth rate formula is as follows re= (d1/po+g} Where re is the expected required rate of returns d1 is dividend last paid po is the intrinsic value of a share g is the growth rate the model considers the following variables the share price at the start of financial year 2015 was 12.46 as provided in the appendix the aggregate dividend payment for the period was $0.333 as per the annual report 2015. to work out the expected annual growth rate (g), we will first obtain the variables of the following formulation g = (1 — payout ratio) x return on equity growth rate as per the annual report for 2015 shall be: g= (1-0.972)8.59%=2.45 in this regards, the cost of equity under the dividend growth model shall therefore be cost of equity={0.33/12.46)+2.45=2.49% evaluation and comparison of models it can be observed that is significant inconsistency between the costs of equity worked out in every method as depicted in the above workings. whilst the required rate of return on the basis of capital asset piecing model being 4.5%, the dividend growth model provides a cost of equity of 2.49% depicting a variation of (4.5-2.5)=2%. the variations m might be due to the fundamentally incorrect nature of the workings. in this regards, it is believed that it is important to appreciate the dividend growth model. whilst defective, it has been in the past repeated that crown limited has paid dividend steadily , at a rate of about 50% of the annual earnings per share. as a result, the assumption that the company pays a constant dividend growth seems to be more likely unlike the assumption that the company with fixed beta[Ana11].13 there is a problem in using the dividend growth model since, it is an infrequent equivalent firm to pay dividend. in this regards for equal justifications, the dividend growth model may instead have been employed to make comparison with the surfeit of non-dividend paying companies listed in the ASX. there is proof that both methods are obsolete d as well as flawed m but it has hard to currently have superior model for working out the cost of equity. cost of debt the cost of debt (kd) is worked out multiplying the weight of every debt component with the interest rate. this is afterwards adjusted to account for the tax shield (30%) due to the tax nature of interest repayment on debt. the non-current debt for crown limited stood at $290,585,400 at financial period ending December 2015. the current liability was overlooked in working the company’s debt financing cost, as short term debt are not continuing debt commitment[Rut09]. the weighted average interest rate for the company’s borrowing mounted to $225,785,058 as variable bank debt which is accounted for tighter with the weighted average interest rate of 6.1% whilst lease liability was $84,410,000 at average weighted interest rate at 5.5%. in this regards, the cost of debt shall be rd= {$225,785,058 *6.1%)/ $290,585,400) + ($84,410,000*5.5 %/%) / $290,585,400) rd= (4.4%+1, 59%) = 5.997% weighted average cost of capital the weighted average cost of capital (WACC) is established by the absolute weight of equity and equity financing cost of debt as well as cost of equity. WACC= (weight of debt+ weight of equity) WACC= (5.997+2, 49*0.5) =4.2% discussion of weighted average cost of capital the importance of working the weighted average cost of capital might just be employed in the consideration of future project where the risk is same to that of company’s current project. the cost of equity of capital asset pricing model substantially exceed that worked out employing the dividend growth model , it might be depicted that the model cost of equity of the model as well as the assumption applicable may have a marked effect on the final weighted average cost of capital. the current weight of debt as well as equity have been employed in working the WACC, which assumes that the firms is currently utilizing its optimal mix of debt and equity. provided that the equity is more risky as compared the debt, the worked out cost of equity is more than the cost of debt and thus, the growth in balance in favor of debt financing which might be seen to be realistic. the growing leverage of the company might be due to debt and equity holders to rising revision of their appraisal of financial risk hence, growing the WACC where the debt financing is used beyond the optimum level. Where the excess equity funding was employed, crown limited might experience a disproportionately high WACC because of expense of equity financing comparative to debt funding[Tho12].14 Works Cited Col05: , (Drury), Wil99: , (Hunter), Gre12: , (Gregoriou), Rog10: , (Hussey), Joh08: , (John B. Caouette), Rut09: , (McEwen), Roy04: , (Nersesian), Ana11: , (Schmidt), Tho12: , (Thomas R. Robinson), Appendices Weekly Prices & Discrete Returns Spot and MIN Stock Date Open High Low Close Avg Vol Adj Close* Mar 28, 2016 12.25 12.52 12.04 12.46 1,298,200 12.46 Mar 22, 2016 0.4007 Dividend Mar 21, 2016 12.11 12.29 11.83 12.25 1,949,200 12.25 Mar 14, 2016 12.25 12.45 12.06 12.10 1,599,700 11.70 Mar 7, 2016 12.19 12.47 12.04 12.30 1,307,900 11.90 Feb 29, 2016 11.76 12.12 11.43 12.07 1,486,100 11.67 Feb 22, 2016 12.19 12.63 11.39 11.75 1,606,500 11.36 Feb 15, 2016 11.44 12.25 10.8338952 12.10 1,303,700 11.70 Feb 8, 2016 11.94 12.08 11.01 10.8338952 1,121,800 10.85 Feb 1, 2016 12.40 12.56 11.86 12.00 1,679,100 11.61 Beta Calculation We used the excel data analysis to generates the following Beta by using the variance and covariance functions Crown Limited S$P 500 Date Adj Close* returns Date Adj Close* returns Beta 28-Mar-16 5.12 0.01185771 28-Mar-16 1.6 0.052632 0.833895 21-Mar-16 5.06 -0.00393701 21-Mar-16 1.52 -0.01299 0.833895 14-Mar-16 5.08 0.09012876 14-Mar-16 1.54 0.019868 7-Mar-16 4.66 0.01084599 7-Mar-16 1.51 -0.03205 29-Feb-16 4.61 0.03363229 29-Feb-16 1.56 0.019608 22-Feb-16 4.46 0.05938242 22-Feb-16 1.53 0.013245 16-Feb-16 4.21 -0.00707547 16-Feb-16 1.51 -0.0443 8-Feb-16 4.24 -0.05567929 8-Feb-16 1.58 -0.04242 1-Feb-16 4.49 -0.01101322 1-Feb-16 1.65 -0.02941 25-Jan-16 4.54 -0.00438596 25-Jan-16 1.7 0.011905 19-Jan-16 4.56 -0.04402516 19-Jan-16 1.68 -0.04 11-Jan-16 4.77   11-Jan-16 1.75 Read More