Ord Minnett conducted a review of Star Entertainment’s Sydney property by way of a number of weekly visits from early March 2017, and noted the changing products, promotions, disruptions, occupancy and activity of its various segments. We maintain our Buy recommendation on Star with a $6.00 target price.
- Star Sydney’s table revenue increased from $545m in FY16 to $576m in FY17. Table activity to start first-half FY18 has been mixed, in line with difficult trading conditions flagged by the company at the FY17 result. However, higher minimum bets (in Blackjack) and improved tournament play have been positives. We forecast 2.3% revenue growth for first-half FY18 on the same period last year for Star Sydney’s main gaming floor tables, down from our previous forecast of 6.4% growth, although we remain positive on the overall outlook.
- Multi-terminal gaming machine activity remained strong over our review period and slot activity was mixed, based on our observations of Lightning Link grand jackpots. Investments in slot products made during fourth-quarter FY17 are expected to drive main gaming floor slot play. We have reduced our first-half FY18 slot revenue growth forecast for Star Sydney to 4.3%, down from our earlier estimate of 6.3%.
- We noted VIP visitation, although the volatility of VIP play makes it difficult to derive any insight as to Star Sydney’s performance in this segment. We believe first-half FY18 VIP turnover will be a major catalyst for the share price, as the market will know whether or not Australia is susceptible to a structural decline in inbound VIP, or if market conditions are only affecting the Melbourne and Perth properties.
- Food and beverage occupancy rates were strong at the start of first-half 2018 and are likely to be boosted by increased main floor visitation. We forecast first-half FY18 sales growth of 5.0% on the same period last year for food and beverage, up from our previous forecast of 3.0% growth.
- Increased tournaments, promotions and investment in products were key drivers of Sydney’s domestic performance in second-half 2017, while promotional activity has continued in first-half 2018. Star Sydney is to host the World Series of Poker, commencing in November, for the second consecutive year. With the jackpot increasing substantially, we anticipate there will be widespread appeal and a significant uptick in trading, food and beverage, and hotel occupancy.
Overall, Star Entertainment has seen defensive, stable and transparent domestic earnings growth, and has invested strategically in expansion and refurbishment in the domestic market. We expect to see continued earnings growth, particularly from its projects in Brisbane and the Gold Coast, coupled with disciplined capital allocation. We believe the Australian domestic gaming market is growing, which has positive implications for Star given its 40% market share.