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Morningstar | Mixed 1H for Star as Exceptional Domestic Gaming Growth was Offset by Weaker VIP

No-moat-rated Star Entertainment reported a mixed interim fiscal 2019 result, with net profit after tax, or NPAT, of AUD 124 million, which was a 2% decline on the prior year. At the current pace the company is tracking below our expectations, and we have cut our fiscal 2019 NPAT forecast by 3% to AUD 260 million. The domestic gaming performed extremely well, with both slots and tables delivering strong growth at Sydney and Melbourne, exceeding our expectations. However, this was largely overshadowed by the disappointing 33% decline in VIP turnover, a trend which we forecast to continue into the second half of fiscal 2019. The board declared an interim dividend of AUD 10.5 cents per share, fully franked, a 40% increase on the pcp, in line with our estimates. Despite trimming our fiscal 2019 earnings, our long-term projections are broadly unchanged. Additionally, we maintain our AUD 4.80 per share fair value estimate, and at the current price the stock is fairly valued.

Sydney’s domestic gaming floor performed exceptionally well, despite the softening consumer environment. Slot revenue grew by 10% on the pcp, exceeding our expectations on the back of strong visitation and market share gains. While this growth should continue into the second half, the pace of growth is unsustainable, and over the long run, we continue to expect mid-single-digit growth on average. Table revenue grew by a healthy 5%, most of which came through the private gaming rooms. Sydney’s EBITDA margin improved by 2 basis points to just over 23%, reflecting: (1) effective cost control as underlying costs only grew at 2%; (2) mix shift towards the higher-margin slot machines and tables games whereas the lower margin VIP fell significantly; and (3) lower player rebates and commissions on the back of softer VIP. We forecast margins to remain relatively flat at around 23%, assuming no major mix shift in future.

The strength in domestic gaming was offset by a sharp drop in international VIP revenue. VIP turnover fell by 33% to AUD 21 billion, despite flat front money. In a similar scenario to rival Crown Resorts, the company experienced strong visitation, although a lower average spend per VIP customer. While we attribute a portion of this to the slowing economic growth in China, management also blamed the unusually high win rate, at 1.62% (compared with the 1.35% normalised rate), the highest it’s been in the last five years, consequently punters cashed in their chips earlier than usual. Sydney felt the brunt of this where VIP turnover halved to AUD 14 billion, whereas Queensland VIP turnover almost doubled (albeit off a much smaller base) reflecting the return on the recent refurbishment and expansion projects. International VIP is cycling a very strong comparable period heading into the second half, and likely to continue struggling during the remainder of the year. We forecast VIP turnover to grow at a mid-single-digit pace until Crown arrives in Sydney in 2021. While Crown’s arrival should grow Australia’s share of the global VIP market, in the initial years, we forecast Star to cede over half of its VIP market share.

Queensland delivered a record normalised EBITDA of AUD 107 million, supported by gaming and nongaming revenue. New assets were successfully commissioned during the period, including the Oasis private gaming room, and harvest buffet--both of which attracted new customers to the venue and contributed to a solid 12% increase in visitation. Operating costs grew by 8%, although this reflected additional investment into the initial service levels at the Gold Coast facility, which should moderate in the coming years. Queensland EBITDA should grow at a mid-single digit pace until fiscal 2023 when the new Treasury casino comes online, at which point we expect earnings to jump to the low 20% range during the first three years of ramp up.