Crown Resorts Unsuitable, But Will Keep Victoria License, Says JP Morgan

Posted on: August 2, 2021, 07:00h. 

Last updated on: August 2, 2021, 10:25h.

JP Morgan is betting that Crown Resorts will be found unsuitable for licensing in the Australian state of Victoria. But Crown will continue to operate its flagship resort in state capital Melbourne, as the cancellation of its license is deferred, speculates Don Carducci, an analyst with the investment bank.

Crown Resorts
Commissioner Ray Finkelstein, seen during a recent hearing of the Crown Resorts suitability inquiry in Melbourne. (Image: The Australian)

A Victorian royal commission is examining Crown Melbourne’s operations after a similar inquiry in New South Wales found Crown had allowed junkets with links to organized crime. The goal of the junkets was to launder money at Crown properties in Melbourne and Perth.

Lawyers assisting the Victoria commission accuse the operator of evading up to A$480 million (US$350 million) in state gambling taxes, while facilitating the laundering of at least A$160 million ($117 million) in dirty cash.

Carducci told The Australian Financial Review he believes the embattled operator will be required to undertake profound reforms and initiate widespread sackings in return for continuing to trade in the state.

Jumpy Investors

This comes as the company’s shares slumped to A$8.61 Friday on the ASX. That’s a fall of 34 percent since the Victoria royal commission began its investigation in the middle of May.

Investors are nervous that Crown will be stripped of its license, as it has been in New South Wales. But Carducci believes that the company’s stock is undervalued.

He expects Crown to emerge rehabilitated in a position of strength over the next few years as the dominant player in the lucrative Australian gaming market. JP Morgan rates Crown’s stock as “overweight.”  

Some analysts have adopted a more cautious tone, however. Goldman Sachs has a neutral rating for Crown and has warned investors the company faces serious risks from impending regulatory action. Crown Melbourne is the operator’s biggest casino, generating up to 75 percent of its profits.

Make or Break

On Tuesday, Crown will argue its case to the commission as to why it should be allowed to retain its license.

While lawyers assisting the commission have questioned whether Crown is capable of reforming its corporate culture and anti-money laundering protocols, they have suggested a potential escape route for the operator.

This would involve an 18-month deferment period that would give Crown the chance to rehabilitate itself. If ultimately necessary, it would also allow a transition to a new licensee with minimum disruption.

The ultimate decision lies with Commissioner Ray Finkelstein, a former judge who has queried whether Crown Melbourne should be owned by a private company at all.

Finkelstein has accused Crown of breaking an agreement with the state that stipulated the Melbourne casino should be “Victorian-run, Victoria-operated, with Victoria’s economic and social interests as its principal concern.”

Thus, according to Finkelstein, Crown’s ownership of properties outside Victoria could represent a conflict of interest.