Australia | Nov 17 2015
This story features STAR ENTERTAINMENT GROUP LIMITED. For more info SHARE ANALYSIS: SGR
-Favourable licence terms
-Seen wining VIP regional share
By Eva Brocklehurst
A new project heralds a new company name, with The Star Entertainment Group ((SGR)), formerly Echo Entertainment, launching its Queens Wharf casino development in Brisbane. The company became the preferred developer/operator in July and has now finalised the agreements with the Queensland government.
The licence term is 99 years with 25 years of exclusivity for a 60 kilometre radius from the site. The Star Entertainment's project capex budget for Queens Wharf is $1bn with earnings expected to flow from 2022. Goldman Sachs expects strong incremental revenue emanating from increased Chinese tourism to Australia and an increasing share of the regional VIP market amid a reduction in smaller domestic operators such as pubs and clubs.
No earnings or returns targets have been identified but the company expects the returns will cover its targets and deliver value to shareholders.
Partners, Hong Kong based Chow Tail Fook and Far East consortium will generate referral fees for VIP business directly passed to Queens Wharf. The Star Entertainment will own 50% of the project and operate a resort as part of the development in return for a fee, expecting to receive around 60% of the cash flow generated by the integrated resort.
The company will continue to operate the Treasury casino and will have three months upon opening of Queens Wharf to transfer that building's current casino operations, whereby Treasury will become a non-gambling retail and accommodation facility.
The Star Entertainment will will retain ownership of the casino and hotel buildings under a long-dated lease. Management has indicated it expects VIP revenue to be marginally lower at Queens Wharf than it is at the The Star casino in Sydney.
The company has been granted a maximum of 2,500 electronic gaming machine licences, above the current Treasury casino allocation of 1,450. Unlimited MTGM (multi terminal gaming machines) and table licences have been granted, consistent with the current licence.
The integrated resort/casino and residential tower will be connected to Brisbane's Southbank precinct via a walk bridge. The next step for the consortium is obtaining planning approval, expected in the second half of 2016. Construction is expected to start in 2017.
Morgan Stanley retains an Overweight rating on the stock, comfortable with the increased domestic returns that are being driven by demographic shifts amid optimism Australia will continue to win global VIP market share, benefitting from weakness in Macau. The broker forecasts FY15-18 compound earnings growth of 14%.
Deutsche Bank finds the parameters of the project positive for the company, especially in relation to the capital requirement, licence terms and management agreement. The broker expects it will generate revenue of $1.13bn and a pre-tax return on capital of 13.8%.
The company is also expected to fund its share of capital requirements from cash flow and debt. Deutsche Bank increases earnings forecasts by 1-2% to reflect the new details.
Goldman Sachs, not one of the eight brokers monitored daily on the FNArena database, has a Neutral rating and $4.70 target. The broker also envisages the company can fund its investments in Jupiter's, The Star and Queens Wharf without the need for additional equity.
The database has five Buy ratings and two Hold for the stock. The consensus target is $5.71, suggesting 16.6% upside to the last share price.
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