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Morningstar | Shares in Star Are Now Fairly Valued Despite Earnings Pressure from Crown Sydney

We have trimmed our near-term earnings estimates slightly (around 2% on average during fiscal 2019-2021) to reflect softness on Sydney’s main gaming floor and moderating VIP growth, both of which we believe are temporary. Notwithstanding, our long-term projections are broadly unchanged, and we continue to forecast low-single-digit EPS growth on average during the five years ending fiscal 2023. Following the recent sell-off, shares in Star Entertainment are broadly fairly valued relative to our unchanged AUD 4.80 per share fair value estimate.

While we expect Crown’s arrival in Sydney in fiscal 2022 to grow the VIP market, we forecast Star to cede substantial share over the three-year ramp up period. In our base case, we assume Crown captures around one third of the Sydney market during fiscal 2022 (its first full year of operations), with the company continuing to gain share, reaching approximately 55% by fiscal 2024, following a three-year ramp-up period. Star Sydney is undergoing an expansion of its premium Sovereign Resort and adding approximately 50% table capacity to the premium room to help it fight with Crown. However, we believe Star’s efforts are too little, too late, and Crown will come out on top. We maintain our view that over the long run Crown outperforms Star in the Sydney VIP market due to its superior location, premium focus, and the allure of a brand-new facility appealing to a larger number of customers.

In addition to pursuing Star's top-tier international VIP customers, we expect a meaningful portion of the domestic players will also be in Crown's sights. As at fiscal 2018, Star in Sydney generated AUD 668 million in revenue on its domestic tables, and we estimate around 30% of this was in the premium member-only Sovereign room. In terms of average member turnover and quality, we view this facility as broadly on par with Crown Melbourne's Mahogany room. These top-tier (excluding VIP) domestic table clients are likely targets for Crown. While membership criteria are somewhat ambiguous and to a large extent discretionary, we estimate minimum spend for a platinum customer (Mahogany/Sovereign) at around AUD 30,000 per year. We estimate by fiscal 2024, Crown will take around 55% of the Sydney premium gaming market (equivalent to around 22% share of the total domestic table market), most of which will come from Star's platinum membership base leaving the firm with around 45% share. (For further details refer to our recently published report ‘Is Sydney Casino Crown's Ace in the Hole?’ published on 14 December 2018).

While the majority of the firm's premium game turnover will come at the expense of Star, we believe Crown's arrival in Sydney will also grow the local market. We project table turnover in Sydney to grow by around 9% per year on average during Crown's first three years of operations (2022-2024), compared with our 7% per year growth forecast for the preceding decade.