Brokers Back Star Entertainment Expansion

This story features STAR ENTERTAINMENT GROUP LIMITED. For more info SHARE ANALYSIS: SGR

Star Entertainment will accelerate growth projects, leveraging the Asian customer base of strategic partners Far East Consortium and Chow Tai Fook.

-Placement provides certainty to the funding structure, minimising non-gaming capex
-Extra investment will support expansion of the company's properties in Queensland and NSW
-Dividend policy upgraded to range of 70-90% of normalised profit
 

By Eva Brocklehurst

Star Entertainment ((SGR)) has cemented its alignment with Far East Consortium and Chow Tai Fook through a 10% placement, raising $490m. The company will be able to accelerate growth projects and leverage the expertise and Asian customer base drawn from the partnership.

Debt will be reduced and capital for new projects won't be redeployed for some time. The company has upgraded its dividend policy, targeting a pay-out range of 70-90% of normalised profit, up from 50% of statutory profit.

The new dividend policy is considered a significant positive. Brokers agree the company is well placed to deliver on a plan to improve its domestic offering by reinvesting in customers and driving tourism.

The partnership makes strategic sense to Morgan Stanley. It may be dilutive in the near term but investors are advised to look through this one-time impact, given the long-term value accretion on offer and improved balance sheet. The dividend yield is now also attractive.

Marketing Alliance

Ord Minnett expects the alliance to drive hotel occupancy and visits to the company's gaming venues. Meanwhile, the new players now have an interest in promoting Star Entertainment through their extensive Asian tourism and leisure networks.

Citi is also favourably disposed towards this initiative, which is expected to better align all parties' interests. Star Entertainment will have access to a six million customer database and expand its scope beyond just the Queens Wharf re-development.

Chow Tai Fook and Far East will acquire 45.8m shares at $5.35 each. Each party will hold a 4.99% position in Star Entertainment. The partners are also applying to the regulator for approval to increase aggregate ownership to reach a maximum of 19.9% and, if approved, this is expected to provide support for the share price.

The partners have agreed to build up to an additional five towers on the Gold Coast and one in Sydney, as well as develop the Metro West project in Sydney and further projects on the Gold Coast.

UBS believes the announcement provides certainty to the company's funding structure, which will be able to maximise returns by minimising non-gaming capital expenditure and still generate increased visits to the properties through additional hotel developments.

While the equity raising is dilutive in the near term, the broker suggests benefits from the marketing alliance and the upside from new projects should drive a value accretive outcome over the medium term.

Morgans pares back valuation but retains an Add rating, expecting the company to deliver solid earnings growth and an attractive income stream for investors. Risks to valuation include the global economic environment, a reduction in consumer spending and regulatory changes.

Capital expenditure and gearing are expected to be on the low side and proceeds from residential sales are likely to offset equity contributions, so Citi currently assumes just $30m net capital expenditure across FY18-22 for existing developments.

The balance sheet was already in reasonable shape but the extra investment provides head room for further investments in Queensland and NSW, CLSA observes. The broker, not one of the eight stockbrokers monitored daily on the FNArena database, has an Outperform rating and $6.13 target.

Trading Update

The company also provided a trading update which signalled revenue for the March quarter was up 18.8%. This is an acceleration on the first half growth of 15.9% , which Citi attributes to ongoing momentum in VIP and initial contributions from The Darling on the Gold Coast. The broker assumes growth will moderate over the second half to around 15% given tougher domestic comparable period.

Morgan Stanley lifts net profit estimates by 1-6% across FY18-20 on lower net interest costs, although lowers earnings per share estimates by -1-5% because of higher weighted average share count. Given the company's attractive growth outlook and dividend yield the broker considers the discount in the stock is unwarranted.

FNArena's database shows seven Buy ratings and one Hold (Credit Suisse, yet to comment on the update) the consensus target is $6.18, suggesting 18.0% upside to the last share price targets range from $5.90 (Credit Suisse) to $6.60 (Citi).

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