The Star Entertainment Group Limited

Declining Trend in Operating Cost: The Star Entertainment Group Limited (ASX: SGR) is engaged in the business of gaming, entertainment, and hospitality. The Star Sydney, Gold Coast, and Treasury Brisbane are the three segments that the company operates into. The company owns and operates The Star Sydney, Treasury Casino and Hotel, Brisbane, and Jupiter Hotel and Casino, Gold Coast.

Group operating costs of the company have grown from $430 million in 1H FY2014 to $535 millionin 1H FY2019 with CAGR (compounded annual growth rate) of 4.5%, whilst normalized gross revenue has grown from $0.9 billion to $1.3 billion over the same period, representing a CAGR growth of 6.5%. The operating cost as a percentage of normalized gross revenue has declined from 46% to 42% over 1H FY2014 to 1H FY2019.
 

Normalized Gross Revenue & Operating Costs (Source: Company Reports)
 
Operating costs increased 0.3% in 1H FY2019on prior corresponding period. Operating costs as a percentage of Gross Revenue increased in 1H FY2019 on prior corresponding period due to increased domestic contribution.
 
The domestic revenue growth trends across the Star properties have softened since the release of the 1H FY2019 results, with domestic revenue between 1 January and 8 June 2019 up by 0.3% vs the prior corresponding period. Total domestic revenue in FY2019 YTD is up by 3.1% on the prior corresponding period. The international VIP trends from 1H FY2019 have continued into 2H FY2019, with turnover down 31.1% in 2H FY2019 to 8 June 2019.
 
The creation of centres of excellence in Gaming and Marketing as announced earlier by the company helps to improve capability, processes, and decision-making. These improvements create opportunities to generate material cost savings across non-customer facing functions and areas. In the current revenue scenario, initiatives to deliver these cost savings have been brought forward by the company with a targeted $40-50 million per annum cost savings run rate to be achieved by the end of first quarter FY2020. An update will be provided by the Group at the FY2019 results on the expected impact and associated restructuring expenses recognised as significant items in the FY2019 results.
 
The positive domestic revenue growth trend has continued from 1H FY2019 into early 2H FY2019 across slots, tables and non-gaming segments. The VIP trends in early 2H FY2019 is similar to 1H FY2019. Comparisons with the prior corresponding period are difficult given relatively short time period and the earlier timing of Lunar New Year in 2019.
 
Moreover, at Queen’s Wharf Brisbane, excavation of the site is expected to complete in July 2019, in line with project timetables. Costs for that stage of works are slightly below budget.
 
Rationale behind optimizing returns for the centres of excellence:The company has set a strategy for CY2019 to CY2022which is based on executing growth projects. The operating model has been enhanced for growth and returns on larger business with leveraging existing capabilities, investing in specialist areas and driving revenue growth above system.
 
Outlook Ahead: The company expects FY2019 normalized EBITDA in the range of $550-560 million ($568 million in FY2018). All financials and the result will be subject to the end of year finalization processes and external audit of the FY2019 financial statements. Further, at The Star Gold Coast, construction of the first joint venture tower with the partners Chow Tai Fook and Far East Consortium (the Dorsett Hotel and Star Residences) is underway, with completion remaining on track for FY2022.
 
Stock Recommendation: On the price performance front, the stock has generated a negative return of 15.75% and 20.67% in the last 6-months and 1-year. The stock is currently trading close to its 52-week low price and available at price to earnings multiple of 12.790x. The annual dividend yield for the stock stands at 6.18%.
 
With an increase in revenue along with a decreasing trend of operating costs as a percentage of normalized gross revenue since last few years, several project pipelines in progress and on track to be completed, the company is well positioned to derive cost advantages in the industry with higher operating efficiency. While the macroeconomic conditions have been highlighted to have impacted the company's slowdown in performance, SGR can still benefit from several cost management initiatives along with capital developments. We give a “Buy” rating on the stock at CMP of $3.830 (up 0.789% on 12 June 2019 post a heavy sell-off noted in previous sessions and the weakness has now been accounted for in the share price).
 

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