Australia | Aug 29 2016
This story features STAR ENTERTAINMENT GROUP LIMITED. For more info SHARE ANALYSIS: SGR
Star Entertainment is harnessing the buoyant inbound tourist market with its marketing strategy aimed at drawing more business into its casinos.
-VIP patronage in Sydney a highlight and The Star well placed for competition
-Benefits of Chinese tourism largely still to play out across all properties
-Plans to tap the under developed premium mass market
By Eva Brocklehurst
The Star Entertainment Group ((SGR)) is intent on harnessing spending from inbound tourists and has established a proactive marketing strategy aimed at increasing the amount spent in its casinos. Several factors have combined to make Australia a more attractive destination for casino visits, brokers believe, including increased investment in VIP facilities, increased business activity from China and improved airline capacity, along with deeper relationships with junket operators.
The company’s flagship property in Sydney, The Star, has grown market share to 9.1% from 0.7% over the past two years, UBS observes, with the venue boasting several advantages.Tables have benefitted on the main floor from strength in the Sydney property market and an improvement in the loyalty program, UBS contends. While the broker expects market share growth will slow it remains comfortable with a view that The Star will achieve a 10% share.
The highlight for Morgan Stanley from the FY16 results was the VIP patronage in Sydney, which grew 15% in the second half, versus a 10% decline in the broader Australian market. The broker suggests this is an indication of the “gateway” benefits offered by Sydney, as well as the company’s ability to attract VIP players. The theme is expected to prevail out to FY21 and also signals to the broker that The Star is set up well for new competition.
Morgan Stanley observes, at an FY17 price/earnings ratio estimate of 19x, competition and margin risks are adequately priced into the stock, with valuation still attractive. Mass casino patronage may have slowed in the second half and more normalised rates of growth in the first quarter around 4% are expected but Morgan Stanley remains constructive about the medium term.
The broker was also surprised to learn that tourists only account for around 3% of Sydney revenues, highlighting the fact that recent robust mass growth has been achieved just with core local patrons. Morgan Stanley believes the benefits from Chinese tourism growth are yet to be meaningfully felt and the investment to increase the company’s share of the Chinese tourist wallet and tap the under-developed premium mass market should drive further earnings growth and improve the defensive nature of the customer base ahead of the new competition in Sydney.
That said, costs could increase over FY17/18 as management develops its “premium mass” offering but Morgan Stanley remains positive about this investment, as the market is both lucrative and under-penetrated. Nevertheless, equally, there is little revenue to be had against the expenditure in the near term.
Credit Suisse notes two capex growth projects should drive earnings in FY17 and FY18, with the Sydney gaming floor expansion and premium status to improve the company’s capacity to attract low-tier players and upgrade players to premium clients. The broker notes the premium mass market in Sydney is around half as developed as that of Melbourne.
The second project, on the Gold Coast, is the company’s new six-star tower will introduce premium mass and VIP capacity. Management has indicated there is pent up demand for premium product in that jurisdiction. Credit Suisse is erring on the side of caution in its FY17 forecasts, given ongoing renovations and re-branding. The broker believes the company has sufficient funding capacity for the upcoming capital expenditure.
Given the disruption from capital works and increased marketing spending, Deutsche Bank reduces forecasts by 8% to reflect lower earnings from The Star and the increased investment. The broker does note competition in Sydney has been delayed to at least 2021 and the Queen’s Wharf project in Brisbane provides longer-term growth opportunities.
Macquarie envisages high growth in FY17 tourism revenue from increased spending and the tailwinds from hotel refurbishments, yet acknowledges the disruption is greatest for non-gaming revenues in Queensland. The broker highlights the Queensland VIP turnover, down 35.3% in FY16, does reflect a relatively small revenue base which is exposed to large fluctuations.
The impact of the hotel construction in the Gold Coast is expected to be felt in the first half before easing back in the second half. After that, the Gold Coast is expected to grow substantially, with the completion of the re-development at Jupiters anticipated in 2018 coinciding with the ability of this casino to participate in significant tourism growth. Planned seat growth from mainland China into Brisbane is reported to be 54% and Macquarie anticipates the addition of a six-star hotel on the Gold Coast will bring overall demand synergies and cross-selling opportunities.
Macquarie expects Sydney to continue its high levels of growth derived from overseas visitors in FY17, albeit at more modest levels in the second half as the company starts to cycle a sustained period of exceptional international growth.
Morgans tempers earnings forecast because of the increased costs associated with the brand and loyalty strategy and the interruptions with the refurbishments at both The Star and on the Gold Coast. The broker expects operating leverage to return to the business from FY18 following the completion of the capital works.
FNArena’s database shows six Buy ratings and two Hold. The consensus target is $6.48, suggesting 6.7% upside to the last share price.
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