Morningstar | Shares in Star Entertainment Are Still Slightly Overvalued Despite Recent Derating
We are expecting a strong finish to fiscal 2018 for no-moat-rated Star Entertainment group, and we project EBITDA growth of around 15%. A key contributor of this growth will be the ongoing recovery of VIP turnover, which had suffered in periods following the detention of several Crown employees during fiscal 2017. The near-term strength will be partially offset by lower table hold rates, which are impacting performance in Sydney. Despite the stock price falling by over 20% since the start of calendar 2018, shares in Star remain modestly overvalued relative to our unchanged AUD 4.40 per share fair value estimate.On balance the near-term outlook is buoyant, and we project high-single-digit EPS growth on average for the next three years. This is supported by continued VIP recovery, along with the improving performance at the Gold Coast on the back of its recent refurbishment. On our estimates, VIP turnover should increase by over 30% to more than AUD 50 billion in fiscal 2018, comfortably exceeding previous highs and resuming a growth trajectory. High levels of operating leverage, particularly within the VIP business should support a 2% group EBIT margin improvement to around 25% by fiscal 2020, although we believe competitive pressure will cap margin upside at this level.
The stock trades at a fiscal 2018 P/E of 16 times, and while this doesn't appear expensive given the healthy near-term earnings outlook, we believe long-term headwinds will prevent any material share-price rerating. Our primary concerns are: (1) EBIT could take an approximate 15%-20% hit, cumulatively during fiscal 2021 and 2022, as Crown ramps up its Sydney operation; (2) the additional AUD 220 million capital expenditures required to refurbish the premium Sovereign room in Sydney and consequential disruption to trading; and (3) the material risk of overcapitalising on the Queensland projects, especially given the maturity and potentially limited size of these markets.
Star Entertainment Group is a resort company, engaged in gaming, entertainment and hospitality. Co. owns and operates The Star Sydney, Treasury Casino and Hotel, Brisbane and Jupiters Hotel and Casino, Gold Coast. Co. also manages the Gold Coast Convention and Exhibition Centre on behalf of the Queensland Government. Co. segments include: The Star Sydney, which comprises the Star Sydney's casino operations, including hotels, apartment complex, restaurants, bars and night club; Gold Coast, which comprises Jupiters' casino operations, including hotel, theatre, restaurants and bars; and Treasury Brisbane, which comprises Treasury's casino operations, including hotel, restaurants and bars.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.
Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
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