Diversification and Systematic Risk in Crown Resorts Ltd

This report discusses the concept of diversification and its role in managing systematic and unsystematic risks in Crown Resorts Ltd. It also explores the global factors affecting share prices and provides an analysis of the company's performance in terms of risk and return.

ECF1120 Semester 1 2019
Assignment Instructions
2019

Crown Resorts Ltd
Executive Summary
Diversification is the need of the hour because the market is exposed to various risks and
uncertainties. It is one of the vital aspects when it comes to long term planning and return
generation. The current report is based on the concept of diversification and deal with the
ASX listed company called Crown Resorts Ltd. The reports provide a strong emphasis on
diversification together with systematic and unsystematic risk. Further, the global factors that
affect the share prices is even discussed. The report differentiates the company’s return in
comparison to the market return. Overall, the project defines the system of diversification and
how it helps the investor to beat the risks of market.
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Contents
Introduction...........................................................................................................................................4
Key events and driving factors affecting global financial markets........................................................4
Share price trends of the market index and company...........................................................................5
Performance of Market and Crown Resorts in terms of risk and return...............................................8
Diversification, systematic and unsystematic risks................................................................................9
Company’s operations, developments, and/or initiatives from 2014 - 2018.......................................11
Systematic and unsystematic risk........................................................................................................13
Key events and driving factors of global financial markets from 2014 - 2018.....................................14
Recommendation................................................................................................................................15
Conclusion...........................................................................................................................................16
References...........................................................................................................................................17
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Introduction
The Crown Resorts Ltd has been a major mover in terms of share price and the segment has
done a commendable business in Australia. However, the market cannot operate in isolation,
it is influenced by the conditions in the economy as a whole. There are various international
and other domestic factors that influences the operations of the company. The same has been
highlighted and discussed in the report. Further, systematic and unsystematic risk has been
discussed that have a major role to play in the company’s functioning. The continuous
movement of the share price in this domain projects that the company has been doing
reasonably well.
Key events and driving factors affecting global financial markets.
The government exercises a lot of control over the free markets. All the policies that are
being propounded by the government in relation to the monetary terms play a very vital role
in the financial sector of the country. By increasing or decreasing the interest rates, the
government can regulate the speed and growth of the country. The increase in government
activities also leads to remove unemployment and stabilize prices of goods all over the
country. Inconsistent interest rates in the market also lead the international market to be much
more stimulated because of the regular investment inflows and outflows of the country.
International Stocks
It is generally noticed that international stocks are affected because of the general economic
conditions of the country. These stocks are also related to the economy of various other
countries. The US economy is the largest in the world and is one of the most important
financial pillars because of which any kind of economic struggle in the US will affect the
whole world's economy.
Emerging markets
Decoupling has become very popular in the present situation. This is a general economic term
that is used to describe a market which is gradually getting unlinked to another market
(Lapsley, 2012). The huge economies of the world like the United States are highly volatile
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in nature because of which any kind of sell-off ordeal will affect the whole world's economy.
It is of the common factor that investors try to invest in markets which are emerging
constantly so that they can make better revenue (Julia & Elizabeth, 2010). Hence the sell-offs
are very important for the emerging markets because it will make the market more popular
because of which the investors will be attracted towards it. There are many different
commodity markets that have large natural resources reserve. The investors try to invest in a
market where every day new opportunities are arising so that they can pull out money easily
whenever required. Generally, the investors try to track the overall strength and weakness of
the world economy so that they can understand the shift of the market with the change in time
(Gowthrope, 2011).
It was observed that the share of the crown resorts located was one of the most traded stocks
after a clear analysis of the full-year result. Also, it was observed that during the time of
writing, the casino and resort operators share up to almost 3.5% or $13.80.
Share price trends of the market index and company
In the financial year 2018, an increase of 8.5 % in the revenue to $3511.3 million and also a
12.7% increase in normalized net profit after tax amounting to $368.8 million was observed.
Also, it was reported that the revenue who was 4.5 % higher at $3493 million and also the net
profit after tax was down to 70% by $558.9 million. It was clearly noted in the last year
reports about the results of revenue that was gained on the melon resorts and entertainment
which amounted to $1745.5 million. Also, the report stated that expenses and restructuring
cost amounted to $260.2 million (Crown resorts, 2018). The company was also observed to
have diluted earnings of 81.2 cents per share out of which 74% was paid out as dividend after
declaration by the crowns board of 30 cents per share bringing the rate to a dividend of 60
cents in the complete year. The net operating cash flow for a particular period was observed
to be higher than that of the previous year. The current figure amounts to $731.7 million
whereas previously it was $465.7 million.
Figure 1 Share price trend
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The major drivers of revenue and growing profit
It was mentioned in the Australian report segment that an increase in the revenue for non-
gaming facilities, main gaming floor, and VIP turnover was observed. The chairman of the
Melbourne operation, John Alexander plays a very important role while subduing the trade in
Perth. The VIP play of crown Melbourne was been highlighted by a profit of 73.9% on the
corresponding period (Crown resorts, 2018). Also, portfolio of the hotels in Melbourne
enjoyed very high occupancy levels because of which a strong demand in the luxury hotel
accommodation has been observed in the past few years and the average occupancy rate was
also increased to 95%. An increased occupancy level was observed for the hotels present in
Perth.
The digital segment of the crown was observed to have declined revenue. The revenue fell
from $293 million to $266.1 million. Also, this resulted to decrease the earnings before
interest and tax because of which a loss of $7.5 million was observed in the past year. There
are no practical guidelines provided by the management for the financial year 2019 but it has
been stated that the earnings per share will be boosted because of the increased market
buybacks.
Crown was able to buy back only 1.43 million worth of share, but it intended to overtake on
market shares worth $400 million.
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Discussion of share price trends and market index of the company in relation to key
events and major factors
The huge stocks with large market capitals like crown resorts Limited do not attract much
attention of the investors because of the differences present in their capitals. It can also be
observed that in the past that the companies have performed much better while working with
risks than the smaller largest segment of the market. The financial liquidity of the
organization and the concentration of assets have led to acquisitions and cyclical pressures.
This topic requires a very broad focus because of the deep analysis that is required for the
financial reports.
It was observed in the past year that CWN reduced its debt from AU$2.28 billion to AU$1.95
billion comprising of both long and short term debt. Also, a cash flow of AU$465.66 million
was generated during the same period because of which the operating cash was increased to
cover the debt (Breen, 2018). This ratio also determines the operational efficiency of the
organization as an alternative to the return on assets.
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Task 8
Performance of Market and Crown Resorts in terms of risk and return.
Figure 2 Market comparison
As it is seen above the ratios, CWN earnings are better than the market and sector numbers.
This shows that on the font of earnings CWN is better than its peers and market. When it
comes to Price earnings ratio, the company CWN have the best numbers, as it depicts that the
market share is 24 times the earning per share of the company. This also shows that investors
predict the future growth of share price. It is also said that it is way higher than the
competitors and market trends (Breen, 2018).
Also, the other ratios that are a price to book value ratios and price earning growth ratios are
also better the market and competitors trends. Hence it is seen that company financial
numbers are good. It is a good investment option for its stakeholders. Also when it comes to
other parameters like market capitalization, p/e, and dividend yield, it is among the top
performers.
Figure 3 Crown resort financial
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(Crown resorts, 2018)-
Below is shown Cost of capital of CWN which comes down to 2.67% while the return on
investment of CWN is 10.37% which is positive sign for the company. The company shall be
able to pay of its capital cost and the company shall always have surplus position.
Figure 4 Crown resort WACC
Diversification, systematic and unsystematic risks
A diversified portfolio is generally a combination of such multiple assets like commodities,
stocks and fixed income that carries the lowest of the risk and alternatively yielding highest
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returns at the same time. The impact on all these assets arising out of the same economic
event varies from one another and therefore, it is why diversification always works (Adra &
Barbopoulos, 2018). A typical diversified portfolio is one where there is an accumulation of
multiple investment vehicles having numerous features. An investor might only benefit from
diversification if there is a slight correlation between the investments that are accumulated in
the portfolio (Laux, 2014).
An investor shall make use of such investments till the time they are available in the market
and are just slightly correlated with other investments in the portfolio for there is as such no
limit on diversification. Diversification hardly allows the assets to correlate with one another
for when there is a drop in other assets at least there is one asset that rises (Adra &
Barbopoulos, 2018). Therefore, even if few assets are not doing well there are certainly some
other assets that are performing great and this will ultimately lessen the overall risk to a great
extent. Undoubtedly, the benefits are derived from such assets at the lowest risk. One can opt
for a diversified portfolio of investments and make the best use of it so as to combat any
financial crisis (Titman, Martin, Keown, & Martin, 2016)
Unsystematic risk is a risk that specifically impacts a single organization or a few
organizations. To overcome or ease unsystematic risk one can take up diversification as an
effective strategy (Leo, 2011). A diversified portfolio of investments will allow an
organization to overcome the losses arising out of less performing investments from the
investments that are performing great. The risk that can be diversified differs from
organization to organization that is if an organization is yielding huge revenues then it's stock
price shall be higher while if an organization is yielding low revenues then it's stock price
shall be lower.
In order to lower or get rid of risks, investors opt for diversification strategy where the shares
of various companies are purchased. Higher diversification will result in lower risks. Multiple
risk management strategies and tools are implemented so as to deal with unsystematic risk.
Investment such as shares or debentures always carries a significant amount of risk. Both
systematic and unsystematic risks are significant components of risk and account for total
risk when combined together (Madura & Fox, 2011). Variables that are external and
uncontrollable and aren’t firm-specific accounts for systematic risk. It impacts the overall
market which ultimately influences the prices of all the securities. It is a risk that is related to
the market. While unsystematic risk is one that is firm-specific and arises out of internal and
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controlled variables. The diversified portfolio of investment helps in reducing or eliminating
unsystematic risk while systematic risk cannot be reduced or avoided by the same (Melville,
2013).
Diversification
Diversification in the context of investment portfolio means a variety of assets which are
combined together for the purpose of minimizing risk and maximizing profits in the portfolio.
The main purpose of diversification is risk management (Petty et. al, 2012). Investment in
various portfolios (Like Government securities, shares and debentures) increase the risk and
to minimize the risk, the portfolio should be designed in such a way that risk is minimized
and return is maximized (Sword, 2018). Investing in different assets of varied industries and
companies helps in risk management as a value of assets of different companies and
industries will not move together (Mersland & Urgeghem, 2013). For this reason,
diversification is done.
Systematic Risk- It is that type of risk which can`t be controlled. It is present in every market,
sector, and segment. It is inherent in the industry and businesses itself. These risks are highly
unpredictable and can’t be avoided by framing any policies. For Example Global Slowdown,
Change in Interest Rates, Natural calamity, etc (Crown resorts, 2018).
Unsystematic Risk- On the other hand, this risk can be predicted, understood and to an extent
nullified also. This risk is inherent to any product, services or industry. For example
Management exit, New Competitor, Change in customer taste or regulatory change.
1Company’s operations, developments, and/or initiatives from 20 4 -
1820
As seen from the Annual report 2018 published by the company for its stakeholders, it can be
said the company Main floor gaming revenue has increased by 1.5% and modest growth in
Melbourne. Also, the VIP program play turnover has increased by 54.5% compared to last
years. Normalized EBITDA increased by 7.2 % (Crown resorts, 2018). The resorts of CWN
are some of the finest in the country which attracts the world`s tourist for luxury and its
hospitality. The company has completed its all capital expenditure projects as well, giving
them a strategic edge over its peers. The company also offers loyalty rewards to its members
in the form of an invitation to special events and all year events and discounted prices
(Pearson, 2019). This move has increased its customer base and edge over its competitors.
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The company also take cares of its employees as well by offering them the world best
training facilities and growth options. The company runs various training levels in the
company in which the company enrols its employees and trainees as well. The company one
of the objective is to keep its employees at best at what they do. The company keeps check of
health, safety and other well being of its employees. The company has 1600 guest rooms in
their three hotels namely Crown towers, Metropol & promenade with total 878,000 guest’s
rounds the year and 93% occupancy which shows that the company hotel is high in demand.
Figure 5 5 years financial data
(Crown resorts, 2018)
Here it can be seen that the company revenue are steady despite a fall in the year 2017, the
company revenues are stable. The operating income & margins have taken a big dip in the
year 2018 on account of inflation. The net incomes are in positive numbers in all 5 years.
Figure 6 Revenue of Crown resorts
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Systematic and unsystematic risk
The two unsystematic risks that are present in the company are Bank Interest rates & Foreign
exchange rates. The company has both Bank interest liabilities and payment of debts &
expenses in foreign currencies. In case there is a change in either of the two upwards there
shall be excess cash flows which is liable to be paid. The company enters into forwarding
exchange contracts which need to be fulfilled in the same currency in which the contract is
entered. The company has exposures in dollars, GB pound, HK dollars (Crown resorts, 2018).
The net exposure is in negative which shows that any change in exchange rates shall bring
loss due to exchange fluctuations. The company has a financial investment in foreign
exchange and financial liability against it as well. These two unsystematic risks are present in
the company which is peculiar to this company only (Pearson, 2019). Below is an example of
company investment in foreign currencies and its liabilities against it. This is a two-year
comparison.
Figure 7 investment in foreign currencies
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(Crown, 2018)
1Key events and driving factors of global financial markets from 20 4 -
1820
Since the world has opened up its economy to globalization more and more countries have
come up to join hands and help each other in this need of the hour. The world is now facing a
debt crisis where banks are not able to recover its debts from its borrowers. The banks play
like the right hand of the government. Oil prices play a major role in deciding the fate of any
country. Unfortunately, oil and its components are found in limited parts of the world which
limits its supply but increases its prices at large (Crown resorts, 2018). The world is facing a
mortgage crisis in which thousands have not been able to repay their housing loans and banks
have become bankrupts due to this. For instance: Lehman Brothers, Barclays, and Bank of
America.
In the year 2015, China emerged as the world largest economy ahead of the European Union
and the USA. Even in the year, 2015 Greece defaulted all its debt payments so it triggered the
eurozone debt crises. This created a global fear of slowdown. The world other countries are
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also facing a debt crisis. Time to time, any natural calamity hits and it costs millions to cover
up the loss of lives and other things. For ex: In the year 2017, Hurricane Harvard hit parts of
USA and caused $ 180 billion of damage. This was the biggest natural disaster in history.
There have several terrorist attacks by terror organizations and counter them a huge GDP part
is to be diverted to control these events. These events are hard to control and out of
proportion. Also, the countries in need to gain supremacy are investing heavy in arms and
nuclear power, while it is estimated that more than 20% of the world population are below
the poverty line or are at bad living conditions (Crown resorts, 2018). The limited drinking
water is also a big problem which is now becoming a global problem. In the light of all these
financial events, The systematic risks at large events like these which are totally out of
control of any country or world. Entire economy takes a hit by large and effects investments
by potential investors.
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Recommendation
Crown resorts operates with a practice of a stable dividend policy and aims to pay
approximately 60 percent per share in a financial year, however, is subjected to the
company’s financial position. The dividend policy is a major key for the mature companies
and is set at a level where the company still comprises of cash for re-investment. In 2018, the
dividend of Crown was 74% of the EPS. The dividend is suited to the investors who are
income seekers and looks sustainable depending on the earnings of the company. Crown is
investing in new projects and will help in the earnings over the coming years. By providing a
strong dividend yield of 4.5%, Crown has a huge PE ratio that is 25.6. If Crown is purchased
today then the investment will be locked in the PE ratio of 20 and the same 4.5% dividend
yield by 2020. Moreover, the debt to equity ratio of 0.38:1 is more than the market average of
0.28:1. Crown is a company with strong fundamentals however; the present price tag is
expensive considering the regulatory impacts. Australia is highly relaxed with the law of
gambling that has allowed businesses in this space to prosper. Going by the overall study, it
can be commented that it is better to invest in a diversified portfolio because it can help to
beat the risks of the market. Investing in a single stock is highly risky as in the case of
downfall, the entire return will be beaten however in the case of portfolio the downfall can be
minimized.
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Conclusion
Hence, from the overall discussion, it can be commented that diversification is the need of the
hour as it helps in maximization of return by investment in different areas that will react to
the multiple events. Though, guarantee cannot be provided against the loss yet it is the main
tool through which long range financial goals can be attained. In the case of Crown resorts, it
can be commented that the company is exposed to different systematic and unsystematic risk
and in the event of this any negative impact can lead to a decline in the price of share. Hence,
it is imperative that creating a portfolio will help thee investor to attain a better perspective
and returns.
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sell/
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