The Star Entertainment Group Limited

SGR Details

Indicative Proposal for a Merger: The Star Entertainment Group Limited (ASX: SGR) operates in the gaming, entertainment, and hospitality segment. The company operates The Star Sydney (Sydney), The Star Gold Coast (Gold Coast) and Treasury Brisbane (Brisbane). The Company also manages the Gold Coast Convention and Exhibition Centre on behalf of the Queensland Government and invests in various strategic joint ventures. The company has announced on 10 May 2021 regarding an indicative proposal to merge with Crown Resorts Limited by offering 2.68 of SGR shares for each share of Crown Resorts Limited. The company expects the merger to create a cost synergy of $150-$200 million per annum with an estimated net value of $2bn. The merger is expected to create geographic diversification with portfolio of services, strengthen balance sheet, additional free cash flow to fast-track debt repayment and continued investments. The merger of both the entities is a proposal at this time and may or may not turn into a transaction, going forward.   

1HFY21 Financial Highlights: The company has witnessed a decline in its revenue to $741.4mn in 1HFY21 as compared with $1,053.7mn in 1HFY20 due to impact on volumes caused by Covid-19 related situation. The company has posted a decline in its NPAT to $51.2mn in 1HFY21 as compared with $76.5mn in 1HFY20. The company has seen an increase in its cash and cash equivalent situation to $88.6mn as on 31 December 2020 as compared with $66.1mn as on 30 June 2020.

Cash and Cash Equivalents Position (Source: Company Reports)

Key Risks: SGR holds interest bearing loans and borrowings, so any severe change in interest rates may lead to financial loss for the company. The company has witnessed an impact on its profitability during COVID-19 situation. Due to border closure and social distancing restrictions, the volumes across the properties were impacted.

Outlook: SGR has provided its guidance for FY21 and FY22. The company expects its Depreciation and Amortisation expense of ~$210mn in FY21 and ~$200mn in FY22. Net funding costs to be in a range of $55-$60mn in FY21. Capex plan for FY21 is expected at ~$100mn. SGR is undertaking a fixed cost reduction program of $50mn in FY21. 

Valuation Methodology: EV/Sales based Relative Valuation Method (Illustrative) 

Data Source: Refinitiv, Thomson Reuters, 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 of SGR gave a return of ~8.78% in the last one month and a return of ~9.63% in the last three months. The current market capitalisation of SGR stands at ~$3.72bn as of 10 May 2021. The stock is currently trading above the average 52-week price level range of ~$2.46-~$4.30. On the technical analysis front, the stock has a support level of ~$3.875 and a resistance of ~$4.526. We have valued the stock using an EV/Sales multiple-based illustrative relative valuation method and arrived at a target price with a correction of low single-digit (in % terms). We believe that the company can trade at a slight premium as compared to its peer average, considering the rising cash position and expected synergies from the proposed merger with Crown Resorts Limited. For this purpose, we have taken peers Crown Resorts Ltd (ASX: CWN), Tabcorp Holdings Ltd (ASX: TAH), Ardent Leisure Group Ltd (ASX: ALG) to name a few. Considering the company has seen a decline in its NPAT and revenue in 1HFY21, sharp rise in the stock price, associated risks with the business, valuation, and current trading levels, we suggest investors to book profits and recommend a “Sell” rating on the stock at the current market price of $4.21, up by ~7.672% as on 10 May 2021, owing to the news regarding the proposed merger with Crown Resorts Limited.

SGR Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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

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