FY19 Outlook Shines Brightly For The Star

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

The Star Entertainment Group is looking ahead to robust earnings trends amid a large contribution from VIP revenue.

-Scope to flex dividend pay-out depending on capital expenditure
-Concerns over Sydney's Sovereign Room considered overdone
-Risks to Queen's Wharf construction costs reducing
 

By Eva Brocklehurst

The Star Entertainment Group ((SGR)) delivered a robust FY18 result, with a focus on cost management and dividends. The company also made some positive comments about revenue trends in the new financial year, providing a boost to the stock.

UBS welcomes the focus on costs, in light of rising wage inflation and an inefficient cost base at the Gold Coast casino after the re-launch of the property. The Star appears to have an ability to generate strong earnings growth amid a large contribution from VIP revenue.

Operating earnings (EBITDA) of $588.1m were ahead of estimates. Substantially lower interest costs and good margin improvement in Sydney made up for a miss on Morgans' estimates in the Queensland division.

Following the placement to its strategic partners in March, and subsequent change to the dividend policy, brokers assess the stock now offers an attractive fully franked FY19 dividend yield of 4.2%. UBS also envisages scope for the company to flex its pay-out, depending on capital requirements.

The company plans to ramp up its marketing activities to existing VIP and premium customers of Chow Tai Fook Enterprises and Far East Consortium, which should help lift attendance.

CLSA believes both Sydney and Queensland have started FY19 on a positive footing and domestic trends are improving, although suspects the near-term may be choppy and positive catalysts will be limited as the company delivers on the Sydney Sovereign Room re-development. CLSA, not one of the eight monitored daily on the FNArena database, has a target of $6.33 and a Buy rating.

Macquarie observes the casinos benefited from greater hotel capacity and new food and beverage offerings. Sydney, in particular, has recovered from three half-year periods of a decline in non-gaming revenue.

The Star is now the preferred destination for VIP in Australia, Ord Minnett points out and investing in the domestic offering via loyalty programs and joint ventures should drive strong earnings growth.

VIP growth stood out for Morgan Stanley, too, and the company now has 50% market share of Australasian VIP business. The broker believes The Star is well-positioned, leveraging improving junket business. The VIP businesses is expected to grow 16% in FY19.

Morgan Stanley considers the discount in the stock unwarranted and there is a probability the share price will re-rate further after a positive trading update at the AGM in November, amid potential for Far East Consortium/Chow Tai Fook Enterprises to increase ownership to 19.9%.

Sydney

Sydney revenue grew 17.5% and normalised operating earnings 27.9%. Attendance was up 11.4% while table revenue was down -1.84%. VIP turnover was up 57% and The Star Sydney is now positioned as the number one VIP resort by turnover in Australasia.

The expansion of the Sovereign Room, expected to be completed in the second half of FY20, may weigh on investor views in the near term. Macquarie expects some disruptions through FY19 and table/slots within this segment declining -7%. Credit Suisse upgrades estimates for Sydney's operating earnings and while maintaining table revenue expectations for the Sovereign Room, assumes some improvement.

The company has presented information the broker considers compelling, suggesting the weakness in the Sovereign Room in the second half was temporary and there is a reasonable prospect that premium mass revenue can hold up at least, if not grow.

Morgan Stanley believes concerns around the Sovereign Room are overdone and the market is overestimating the impact of the refurbishment. The company is reporting positive feedback albeit with only one week of temporary trading.

Queensland

Queensland revenue was up 10.5% but offset by increased costs, which Morgans suggests warrant further investigation. Domestic revenue was up 7.4% and tables grew 6.3%. VIP turnover was up 41%. Credit Suisse considers the Gold Coast will be a driver of earnings over the next two years. Management will concentrate on VIP and premium mass now that The Darling Hotel Tower is fully operational.

Treasury Brisbane's market share remained flat at 23.2% but Macquarie observes this has stabilised from ongoing declines since FY15. Macquarie agrees the results at Gold Coast reveal the market opportunity in Queensland and the expansion is starting to show benefits, with increased local market share and high levels of growth.

Expected development costs per Gold Coast Tower 1 have been reduced by $30m to $370m, which the broker believes is a good outcome, given investor scepticism about cost escalation.  Moreover, Macquarie suspects ongoing growth on the Gold Coast may allow more opportunities in Brisbane to be revealed, albeit Queen's Wharf is some time away.

The company will soon go to tender 45% of the project costs covering the internal structure at Queen's Wharf. Total project cost was guided at $2.4bn. As some of the cost is now sunk and confidence is improving with regards to the earnings potential of the project, Credit Suisse incorporates a positive valuation contribution of $0.45 a share.

Morgan Stanley had been concerned that the upgrade to capital expenditure guidance in May was just the start of an increase in the capital expenditure cycle. Yet, with construction of the first tower at the Gold Coast contracted at -8% below original forecasts and the majority of the Queens Wharf project to be tendered as the Queensland market is softening, the risks are reducing.

The database has a full suite of eight Buy ratings. The consensus target is $6.12, suggesting 12.3% upside to the last share price. The dividend yield on FY19 and FY20 forecasts is 4.2% and 4.5% respectively.

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