Last week our research team analysed The Star Entertainment Group (SGR) and initiated research coverage on the company with an add recommendation for growth orientated investors. We put a 12 month valuation on the business of $6.90 per share vs the current share price of $6.
Who is The Star Entertainment Group?
The Star Entertainment Group Limited (formerly called Echo Entertainment Group Limited) provides leisure and entertainment services particularly in relation to casino gambling, entertainment and hospitality. SGR listed on the Australian Stock Exchange in June 2011 after the demerger from Tabcorp Holdings Ltd (TAH). The standalone entity operates casinos in New South Wales and Queensland.
SGR’s key assets include The Star in Sydney, Treasury Casino & Hotel in Brisbane and Jupiters on the Gold Coast. Star is also participating in the A$3 billion redevelopment of Queen's Wharf Resort in Brisbane. The Queen’s Wharf project involves the development of an integrated resort and entertainment precinct and a residential precinct of about 2000 apartments in the Brisbane CBD. SGR will hold a 50 per cent interest in the integrated resort (with Chow Tai Fook Enterprises and Far East Consortium (Australia) each holding 25pc).
Strong inbound tourism
SGR is a key beneficiary from strong inbound tourism and increasing tourist spending on gambling. Australia has witnessed strong inbound tourism growth over the past three years with annual increases exceeding 6.5pc p.a. Growth from financial year 2015 to 2016 was 10.1pc p.a, which was above the 9.3pc p.a previously forecast by Tourism Research Australia (TRA). While this level of growth is expected to moderate, it is expected to remain well above the levels seen over the past 10 years. TRA is forecasting inbound arrivals to grow at an average of 5.6pc p.a. for the period through to 2025 which compares to the past 10 year average of 3.6pc p.a. China in particular is expected to generate strong arrivals growth over the next 10 years and will soon eclipse NZ as our largest international arrivals market.
Domestic gaming revenues have remained strong and were up 6.1pc relative to the previous corresponding period for the four months to the end of April 2016 after having been up 10.2pc in first half of 2016. We expect continued growth in this segment at an average 5.0pc p.a over the next three years.
Spending money to make money
SGR is currently spending $500m to upgrade The Star Sydney. Capital works include expanding the gaming operations and the food and beverage offering in addition to upgrading the hotel and providing better customer access. We expect these upgrades, when coupled with implementation of the next stage of the customer loyalty program, will drive customer volumes and spend over the coming years.
At Jupiters Gold Coast, SGR is undertaking an A$345m redevelopment which consists of the refurbishment of the existing hotel and gaming offering as well as the expansion of the food and beverage offering. A new 6-star suite hotel is also being built. Construction began in August 2014 and is expected to be completed well ahead of the 2018 Commonwealth Games which are being hosted at the Gold Coast.
Add recommendation and valuation of $6.90
Star is well positioned to capture a larger share of inbound tourist spend over the years ahead as it improves the quality of its offering at both The Star and at Jupiters Gold Coast. While ongoing refurbishments are likely to hamper earnings near-term, we believe this creates an opportunity for investors to position ahead of earnings growth ramping up in 2018 and beyond. We also believe that SGR represents good value, given its growth outlook when compared to its listed peers in Sky City (SKC) and Crown Resorts (CWN).
- Justin Still, Investment Adviser (Authorised Representative: 000279726) Morgans Financial Limited | ABN 49 010 669 726 | AFSL 235410.