One Mid-cap Stock to Invest in the Gambling and Entertainment Space-  SGR

The Star Entertainment Group Limited

SGR Details

Executive Shuffle: Star Entertainment Group (ASX: SGR) operates in Casino & Gambling (GICS sector) linked to hospitality and entertainment services. The company operates: The Star Gold Coast, The Star Sydney, and Treasury Brisbane in Australia. SGR operates hotels, casinos, bars, and other entertainment facilities.

• During the past few weeks company went through significant changes in management where three senior executives, Mr. Harry Theodore (CFO); Mr. Greg Hawkins (Chief Casino Officer) & Ms. Paula Martin (Chief Legal & Risk Office & CS), resigned before the public inquiry on the review of the casino system and processes.
• SGR has recently suspended its VIP rebate program which was used to attract high-spending gamblers because the company facing inquiries from regulators on its suitability to run its Sydney casino.
• On 26th May 2022, Queensland Government announced to introduce legislative reforms in the regulatory framework of Queensland casino through Casino Control and Other Legislation Amendment Bill 2022 (Bill). The impact of the bill will be assessed in the future after the parliamentary discussion.

• In connection with the review of the process of Star Sydney, company decided to renew its board where Mr. Ben Heap assumes the role of interim Chairman and Mr. Goeff Hogg as CFO from 1^st June 2022, this decision came after the resignation of Mr. John O’Neill AO as Executive Chairman.

Substantial Shareholding: L1 Capital Pty Ltd increased its voting right in SGR from 6.34% to 7.34% on 17^th May 2022.

H2FY22 highlights, (Source: Analysis by Kalkine Group)

Key Risks: The company faces governance issue and needs to redefine its system and increase transparency, further COVID-19 continues to impact its revenue even in H2FY22 due to the Omicron variant.  

Outlook:

• The company’s VIP rebate program suspension itsis expected to not have any substantial impact on its revenue, as the company has already started reducing focus on this program during FY21.
• The recent reshuffle of management and review of its casino system will improve its transparency going forward. The previous management was responsible for setting the culture of the organization and a shuffle will improve its system.
• Company provided an update on Early H2FY22 revenue from the period 1^st Jan 2022 to 13^th February 2022, the entire group’s revenue was up 7% on PCP.
• The recent inquiry on SGR will have a temporary impact on the firm but in long run, it will improve its structure and increase transparency.

Valuation Methodology: P/E Multiple Based Relative Valuation (Illustrative)

Source: Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation: The stock is currently trading below its average 52-week low-high level of $2.910 - $4.660, offering a decent opportunity for accumulation. The stock has been down by ~3.87% in the past one month. The stock has been valued using the P/E based illustrative relative valuation method and arrived at a target price of low double-digit upside (in % terms). The company might trade at a premium than its peers’ median P/E multiple, considering the better H1FY22 results, process review, executive shuffle, and expectation of improved H2FY22 results. For the purpose of this valuation, a few peers like Skycity Entertainment Group Ltd (ASX: SKC), Jumbo Interactive Ltd (ASX: JIN), Crown Resorts Ltd (ASX: CWN), and others have been considered. Considering the upside valuation, positive H2FY22 result expectation, executive shuffle, growth from non-gaming revenue, and key risks associated with the business, we recommend a ‘Speculative Buy’ rating on the stock at the closing market price of $2.980, as on 27 May 2022.

Markets are trading in a highly volatile zone currently due to certain macroeconomic issues and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

SGR Daily Technical Chart, Data Source: REFINITIV 

Note 1: The reference data in this report has been partly sourced from REFINITIV

Note 2: Investment decisions should be made depending on the investors’ appetite for upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the analysis has been achieved and subject to the factors discussed above alongside support levels provided.

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and a downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock price

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