Star Entertainment Discount Unwarranted?
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Star Entertainment ((SGR)) posted a consistent growth rate across the first 16 weeks of the first half at its Sydney and Queensland properties. Moreover, this was the strongest rate in the Australian gambling sector over the period, UBS asserts. This suggests that recent capital expenditure completed on the Sydney and Gold Coast properties is contributing to growth.
Growth in the period was against a soft comparable and, as comparables will also soften during November/December, Macquarie forecasts 6% domestic growth for Star Entertainment in the first half. The domestic business is the highest quality component, in the broker's opinion, contributing more than 85% of operating earnings.
Both the Sydney and Gold Coast properties will benefit from less disruption going forward, as well as the investment in loyalty programs. Macquarie expects Queensland will deliver higher growth than Sydney in FY18/19, supported by the opening of the new 60-room six-star hotel in December. This also includes an expansion of the gaming floor.
Deutsche Bank increases FY18 and FY19 forecasts by 2% to reflect the net impact of higher Star Sydney and Gold Coast earnings, partly offset by lower treasury earnings. The broker expects earnings growth will be driven by the expansion of the main gaming floor in Sydney, the new hotel tower on the Gold Coast and the relaunch of the loyalty program. An absence of construction disruption will also help.
Meanwhile, the Queens Wharf project in Brisbane provides longer-term growth opportunities and competition in Sydney has been delayed until at least 2021. Comparables should get easier from this point, the broker suspects and treasury should begin to improve as the reinvestment and marketing initiatives take effect.
Within the Queensland casinos, the broker expects Gold Coast will continue to perform well, primarily driven by non-gaming, while Brisbane will underperform, albeit not to the same extent as the second half of FY17.
Citi, too, expects growth to accelerate in November and December on weak comparables and now assumes 5.6% domestic growth in the first half. This comes on the back of the opening of the tower on the Gold Coast and the Gold Coast Commonwealth Games to be held in mid April 2018.
VIP turnover was flat but Macquarie considers this a good outcome, given the cycling of turnover that occurred ahead of the arrest of Crown Resorts ((CWN)) personnel in China, and the fact that Star Entertainment reported -12% and -27% declines in turnover during the first half and second half of FY17 respectively. That said, VIP is the company's lowest margin business.
UBS also flags the fact it is now 12 months after the arrests of Crown personnel, which suggests growth is unlikely to deteriorate. Deutsche Bank notes a low win rate in the VIP business reduced reported revenue to -12.4% and attributes flat VIP turnover to a diversification strategy.
Strong growth in Southeast Asian premium mass play has occurred, while junket play is returning. Citi also expects support from Southeast Asian players and activity in China from the junkets.
The most surprising and pleasing outcome from the AGM trading update, in Morgan Stanley's view, was the solid performance in VIP. The broker upgrades VIP revenue forecasts by 4%.
Given the attractive growth outlook, the stock, the cheapest Australasian casino operator, reflects an unwarranted discount and Morgan Stanley believes the AGM update should provide investors with confidence that the company can execute on its growth plans.
FNArena's database has eight Buy ratings. The consensus target is $6.18, signalling 8.0% upside to the last share price. Targets range from $5.90 (Ord Minnett) to $6.85 (Citi). Not all brokers have as yet updated post the latest trading update.
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