Company Overview: The Star Entertainment Group Limited, formerly Echo Entertainment Group Limited, operates in the gaming, entertainment and hospitality industries. The Company owns and operates The Star Sydney (The Star Sydney); Treasury Casino and Hotel, Brisbane (Treasury Brisbane), and Jupiters Hotel and Casino, Gold Coast (Gold Coast). The Company's segments include The Star Sydney, Gold Coast and Treasury Brisbane. The Star Sydney comprises The Star Sydney's casino operations, including hotels, apartment complex, restaurants, bars and night club. The Gold Coast segment includes Jupiters' casino operations, including hotel, theatre, restaurants and bars. The Treasury Brisbane segment includes Treasury's casino operations, including hotel, restaurants and bars. The Company also manages the Gold Coast Convention and Exhibition Centre on behalf of the Queensland Government. The Company also owns Broadbeach Island on which the Gold Coast casino is located.


SGR Details

Solid Domestic Performance in 1HFY19; Decent Outlook: The Star Entertainment Group (ASX: SGR) is principally engaged in the activities of managing integrated resorts with gaming, entertainment and hospitality services. It operates The Star Sydney (or Sydney), The Star Gold Coast (or Gold Coast) and Treasury Brisbane (or Brisbane). As on March 14, 2019, SGR had a market capitalisation of ~$3.93 billion. Over the last five years (FY14-FY18), the company’s revenue and statutory NPAT have grown at a CAGR of 8.2 percent and 8.6 percent, respectively. Recently, the company posted its solid results for the first half ended 31 December 2018 wherein statutory gross revenue increased by 5.0% to $1,150.1 Mn and statutory EBITDA grew by 65.9% to $331 million in 1HFY19 over the prior corresponding period. It was mainly driven by high quality, broad-based domestic revenue growth supported by a high win rate in the International VIP Rebate business of around 1.62% versus 1.06% in the PCP. The company’s normalised gross revenue witnessed a decline of 6.1% in 1H FY19 on PCP and stood at $1,277 million. However, SGR’s statutory net profit after tax amounted to $148.5 million which implies the substantial rise of 351.4% high-quality, on PCP.

From the valuation perspective, the company reported a higher dividend yield (Trailing-12-months basis) of 5.0% as compared to the Hotels & Entertainment Services industry average of 3.0% representing more income for its shareholders.It has a price-to-book value multiple of 1.0x, and this may look to be on a lower side while comparing with the industry average of 1.9x and represents an undervalued scenario at the current juncture. The Star Entertainment Group is currently trading at PE multiple of 14.59x of FY20E EPS. The company enjoys decent financials in term of the respectable balance sheet, prudent CapEx approach towards business developments, and has regularly been paying dividends to its shareholders. Keeping the view of decent outlook backed by good financials, healthy international tourism, focus on executing its long-standing strategy of investing in privileged assets to drive visitation and earnings, and strategic partnership approach to enhance its network across the world-class resorts, we have valued the stock using the Relative Valuation method and five-year average P/E of 19.4x for FY20E with consensus EPS of $0.29 and have arrived at target price upside in the ambit of $4.8 to $5.6 (lower double digit (in %)). Key Risks related to rating: regulatory risk, Geo-political changes which affect the operation of Casinos, uncertainty on consumer spending, and intense competition in the key market of Sydney, Brisbane, and the Gold Coast, etc.


Key Financial Metrics, * estimated as DPS/EPS (Source: Company Reports, Thomson Reuters)

Decent Standing from Margins’ Perspective: The company managed to maintain decent position with respect to its key margins which is evident from its net margin that rose 9.6% YoY to 12.9% in 1H FY 2019 demonstrating an improvement in its capability to convert its top line into the bottom line. Also, the company’s operating margin witnessed YoY improvement of 8.8% in 1H FY 2019 and stood at 19.6% which highlights the company’s cost-effective approaches.

Understanding SGR’s Sydney’s Business: The Sydney business of The Star Entertainment Group posted EBITDA amounting to $170.9 million which reflects the rise of 59% on the PCP on the back of domestic growth and higher win rate in International VIP Rebate business. The domestic revenue growth witnessed was 5.4% on PCP which demonstrates broad-based growth in domestic gaming. The market share of Electronic gaming witnessed a rise to 9.4% as compared to 9% in PCP. We expect that the increased penetration of electronic gaming would support the business and might help the overall company moving forward. With respect to Sydney business, the slots revenue witnessed the rise of 9.9% on PCP basis and the table revenues rose 4.9% on PCP thanks to the robust growth in the private gaming room.

 
Sydney Business’ Financial Metrics (Source: Company Reports)

Registration of Interest Process: The Star Entertainment had earlier noted the intention of Queensland Government to test the market and call for Registrations of Interest (or ROI) for the development of a “Global Tourism Hub” (GTH) on Gold Coast. This happens to be the next formal step of the process which started around 6 years ago as a framework for new regional Integrated Resort Developments. The company has been invited directly into the Expressions of Interest (EOI) phase and would consider its response once further details of the process are made available. The company and its partners are currently in the process of developing multi-billion projects at Queen’s Wharf Brisbane and at The Star Gold Coast property at Broadbeach Island, where a new hotel got opened in the past twelve months, another is under construction, and the plan for further $2 billion-plus investment has been approved by the Queensland Government.

Queensland Business Posted Strong Performance in 1HFY19: The Start Entertainment’s Queensland business posted statutory gross revenues amounting to $531 million which reflects the rise of 31.3% on PCP and its normalised gross revenues were $466 million which reflects 16.1% rise over PCP. The win rate of 2.32% in international VIP rebate business aided statutory gross revenue and EBITDA growth. The investments which were recently wrapped up at Gold Coast have been witnessing positive response by the guests and the domestic and international performance has been encouraging and is evidenced by the visitation which is 11.8% up on PCP and by the international VIP rebate business turnover which increased 90.9% on PCP. However, the electronic gaming market share has also increased. With respect to Brisbane, there has been a continuation of operational improvements as the growth in revenues were witnessed across slots and tables on PCP basis in both private gaming room and main gaming floor. 
 

Queensland Business’ Financials Highlights (Source: Company Reports)

Analysing International VIP Rebate Business: The performance of the segment reflected moderating market growth i.e. there was a high win rate of 1.62% and an unusually low turn of 9.7x. As a result of solid sales performance, there was 10% growth in unique patron visitation with the front money amounting to $2.1 billion which was flat on PCP. The performance with respect to Queensland was robust as there was a rise of 153.9% in the front money on the PCP basis. However, Sydney underperformed and there was a decline of 20% in front money on PCP basis. The turnover witnessed a decline of 33.0% on PCP and stood at $20.7 billion. However, actual revenue rose 2.5% on PCP on the back of high win rate, with normalised revenue down 33.0% on PCP weighed by low turns. The business’ normalised EBITDA margins were in line with the long-term averages even though there were lower volumes.
 
 
International VIP Rebate (Source: Company Reports)
 
Progress Witnessed in Capital Programs: The Start Entertainment’s capital programs have been progressing as there was an increase in property, plant and equipment (mainly Gold Coast and Sydney), an increase in investment with respect to associate and joint venture entities (mainly Queen’s Wharf Brisbane). The company had stated that its balance sheet would be helping in witnessing growth. The conservative gearing is expected to help the investment plans.
 
A Significant increase in Interim Dividends Might Gain Traction: The Star Entertainment had declared interim dividend amounting to 10.5 cps (fully franked) which reflects the substantial rise of 40% on PCP basis demonstrating the positive business momentum and increased dividend pay-out policy. This also represents a 78% pay-out ratio of 1H FY 2019 normalized net profit after tax and would be paid on 3 April 2019. Also, the company’s interim dividend is reflective of the balance sheet strength. The company is also possessing higher dividend yield as compared to the broader industry. As on 13 March 2019, the annual dividend yield of the company stood at 5.49% which is higher than the industry median (Hotels and entertainment services) of 3%, showing that the company is generating more returns for its shareholders. This reflects the positive business momentum and increased dividend pay-out policy which was announced on March 2018 as revised from 50% dividend pay-out ratio of Statutory NPAT to a minimum 70% pay-out ratio of normalized NPAT. Hence, we presume that the balance sheet strength of the company would continue to support the respectable dividend pay-out policy to its shareholders, and it might attract investors’ attention on the stock in the upcoming period.
 

Dividend per share (cents) (Source: Company Reports)
 
What Might Drive Growth For SGR: The Star Entertainment stated that positive domestic revenue growth trends are continuing from 1H FY 2019 in the early 2H FY 2019 across slots, tables and non-gaming. In FY 2019, the company is expected to incur capital expenditure in the range of $300 million-$350 million with additional $100 million-125 million JV contributions. The growth in domestic and international volumes in the Gold Coast helps the company’s growth strategy and confidence in the long-term potential of the location. The construction of the first joint venture tower has started, and the completion has been scheduled for FY2022.


Focused on Execution in CY 2019 (Source: Company Reports)
 
As of now, the company is focused on executing the long-standing strategy of deploying in privileged assets to drive visitation and earnings. The priorities of the management are inclined towards execution i.e. improvement in earnings, delivering on next stage of the capital plans, commercialisation of an expanded joint venture with Hong Kong-based partners Chow Tai Fook Enterprises and the Far East Consortium, and full implementation of an enhanced operating model.
 

Historical P/E Band (Source: Company Reports)
 
Stock Recommendation: The Star Entertainment Group is expected to be helped by positive domestic revenue growth trends which are continuing into early 2H FY 2019. Over the span of the previous 5 years the company’s stock has delivered the strong return of 67.84%. The company is expected to be aided by its strong balance sheet which would assist it in paying dividends. The full implementation of the operating model around the centres of excellence might also help the overall company moving forward. Moreover, the company has been focusing on its operating model that has been enhanced for growth and returns on the larger business. It plans to leverage the existing capabilities, drive revenue growth above system and capture the improvements in productivity. Keeping the view of decent outlook backed by good financials, healthy international tourism, focus on executing its long-standing strategy of investing in privileged assets to drive visitation and earnings, and strategic partnership approach to enhance its network across the world-class resorts, we have valued the stock using the Relative Valuation method and five-year average P/E of 19.4x for FY20E with consensus EPS of $0.29 and have arrived at target price upside in the ambit of $4.8 to $5.6 (lower double digit (in %). The company is also trading towards its 52-week lower level, thus, providing an attractive entry opportunity. Based on the aforesaid facts and decent outlook, we have a “Buy” recommendation on the stock at the current market price of A$4.260 per share (down 0.467% on 14 March 2019).
 
 
SGR Daily Chart (Source: Thomson Reuters)

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