The Star Entertainment Group Limited, an integrated resort company, provides gaming, entertainment, and hospitality services in Australia

Investment Thesis:

Trading below blended valuation (DCF & EV/EBITDA multiple).
Additional cost measures announced to support earnings.
Monopolies in the casino industry in SGR’s operating geographies and is one of the market leaders in other games such as slots.
Economic moat in the nightlife landscape in Sydney given regulatory environment (such as lock-out laws).
Diversified business base across different types of entertainment, hotels, retail stores and food & beverage establishments.
Strong tourism growth once borders reopen is expected to be a tailwind for SGR.
Lower AUD could improve international spending in domestic markets.
Domestic table games segment remains strong.

Key Risks:

Weakening VIP segment, potentially making Sydney less viable.
Further deterioration of consumer spending and household discretionary income
Regulatory risks e.g., repeal of lockout laws could increase competition in the nightlife landscape in Sydney.
Establishment of a new Crown casino in Sydney will increase competition (especially amongst VIP customers) and could potentially dismantle SGR’s monopoly in Sydney.
Win-rate risk (if the casinos have a much lower win-rate than the mathematical expected value).
Potential scandals.

Key Highlights:

FY22 results summary. Compared to pcp: On a normalised basis, gross revenue declined -2% to $1.532bn, EBITDA declined -45% to $237m and NPAT was a loss of $32m (vs profit of $116m in pcp), impacted by Covid-19 related property shutdowns, operating restrictions, and border closures. Statutory net loss (post significant items) was $199m vs profit of $58m in pcp. Operating expenses increased +14% to $909m, reflecting Covid-19 related impacts, inflationary pressures, tight labour market and regulatory review costs (Bell Review, AUSTRAC enforcement investigation).
Operating cash flow declined -61.5% to $181.3m with cash collection down -42% to 81%.
Capex of $141m, within the guidance range of $125-150m and well below D&A expense of $208m.
Balance sheet has ample liquidity position of $513m in cash and undrawn facilities. Net debt declined -2% YoY to $1.15bn, equating to gearing of 2.8x, with the Group fully compliant with June 2022 amended covenants and no covenant relief required for FY23 testing dates. (6) Final dividend scrapped.
By segments. Compared to pcp: Sydney revenue declined -6% to $781m and normalised EBITDA declined -60% to $82m, impacted by the closure of the property for 102 days and operating restrictions due to Covid-19, however, domestic revenues rebounded on opening with 4Q22 domestic revenue consistent with pre-Covid levels with slots revenue up +17% on pre-covid levels partially offset by -8% decline in domestic tables.
Gold Coast domestic revenue was up +11% to $424m with non-gaming revenue up +50%, which combined with +27% increase in opex saw normalised EBITDA decline -20% to $90m. Domestic revenues rebounded in 4Q22, up +48% on pre-Covid level with slots revenue up +50%, domestic tables up +23% and non-gaming up +69%.
Brisbane domestic revenue declined -6% to $326m and normalised EBITDA declined -43% to $65m, however, performance improved in April following removal of Covid-19 restrictions with domestic revenue in 4Q22 up +13% on pre-Covid levels with slots revenue up +26% while domestic tables down -4%.
FY23 guidance and trading update. For FY23 capex of ~$150m (vs prior guidance of ~$175m), D&A expense of ~$200-205m, net funding costs of $60-65m and JV equity contributions of ~$115m.
Trading update (1 July 2022-18 August 2022) group domestic revenue increased +9% on pre-Covid levels (1 July 2019-18 August 2019) with Sydney domestic revenue in-line with pre-Covid levels, Gold Coast domestic revenue up +26% and Brisbane domestic revenue up +18%.
Key executive appointments. Robbie Cooke (ex-CEO Tatts Group and ex-MD Tyro Payments) appointed as MD and CEO.
Scott Wharton appointed as CEO The Star Sydney and Group Head of Transformation.

Company Description:

The Star Entertainment Group Limited, an integrated resort company, provides gaming, entertainment, and hospitality services in Australia. The Company operates through three segments: Sydney, Gold Coast, and Brisbane. It owns and operates The Star Sydney casino, which includes hotels, apartment complex, restaurants, and bars; The Star Gold Coast casino, which consists of hotels, theatre, restaurants, and bars; and Treasury casino in Brisbane that comprises hotel, restaurants, and bars. The company also manages the Gold Coast Convention and Exhibition Centre. The company was formerly known as Echo Entertainment Group Limited and changed its name to The Star Entertainment Group Limited in November 2015.

(Source: Banyantree)

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