Price Appeal

Star Entertainment Group released a trading update where the casino and hotel operator guided to operating earnings of $550–560m for FY19, representing a downgrade of 9% based on consensus expectations. Domestic headwinds from increased petrol prices, falling housing prices and low wage growth – also a negative for Tabcorp (TAH, Lighten) and Crown Resorts (CWN, Hold) – in addition to lower VIP turnover, have affected the company’s second-half performance.

 

Star performed exceptionally well in the 1H19 result – total domestic revenue rose 5.7% – and although recent trends have dampened this performance, an outlook for a 3% rise FY19 revenue remains adequate, in our view. It is worth noting that we have not incorporated $40–50m in cost savings flagged by management. Meanwhile, our deep-dive analysis of the Queens Wharf development suggests potential for consensus upgrades of 8% in the medium term.

 

Internationally, Crown is likely to face similar turnover issues as VIP concerns in Macau persist. Domestically, Victorian monthly slot machine growth was again negative in May as the tightening of rules on ticket-in, ticket-out machines and on the use of EFTPOS – along with soft consumer sentiment – affected the network.

 

Our sum-of-the-parts measure of $4.80 implies Star is trading at a discount of more than 20% to valuation, which reflects another earnings miss/downgrade and will be painful in the short term. We note, however, that there has been increased interest in Australian assets recently, making this valuation more interesting, and we see valuation support at $3.80.

 

Following the trading update, we have reduced our earnings estimates by 14% in FY19 and 12% in FY20, leading us to lower our target price to $5.05 from $5.70. We see Star’s recent repricing as overdone, and suggest global operators running the ruler over Australian gaming assets may provide a near-term catalyst, despite persistent macroeconomic headwinds, and concerns over tourism and the Australian consumer. We maintain our Buy recommendation on Star.

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