Star Entertainment’s earnings update merely puts a set of numbers on what was already understood to be a dismal year financially. Government mandated casino closures due to COVID-19 have punched a large hole in SGR’s earnings this year, but normality beckons and so too does a more familiar earnings profile.
We already knew that The Star Sydney was closed from the start of 1H22 to 11 October 2021, but SGR has now said the casino enjoyed strong revenue growth of 29% on re-opening through to 31 December 2021. Encouragingly, total revenue for the Queensland casinos was stable compared to the prior period despite border closures and operating restrictions.
The clouds are beginning to part for SGR with the peak of Omicron seemingly passed in January. We will be looking for management commentary at the upcoming 1H22 profit result release on 17 February as to the vigour of foot traffic through the various venues.
There are other potential catalysts that could help lift SGR’s share price including the completion of the NSW ILGA periodic review (final report due by 30 June 2022) and the expanded AUSTRAC investigations hopefully by mid-to-late 2022. The Star is still waiting for approval to expand its EGM capacity by 1,000 machines from 2H23f.
A further potential headwind could be the opening of the Crown Sydney casino although there should be enough pent up demand for gaming and entertainment to satisfy everyone. This might now also include a return of international tourists with Australia’s borders to be further opened from 21 February.
The prospects of a tie-up with CWN have all but disappeared following Blackstone’s increased offer for CWN. There may be opportunities to revisit the PropCo/OpCo concept at some future point, perhaps in concert with a Blackstone-owned CWN, but this is not our central case.
Investment view
SGR’s earnings update simply tidies up the market view as to how deeply the 1H22 result had been affected by the pandemic. The market should be looking through the FY22 result towards a much more normal operating environment and once again assessing the very strong underlying nature of SGR’s long-term, quasi-monopolistic, cash-generative assets.
It does take time to assimilate the difficult regulatory period that SGR has endured but such is the nature of this heavily scrutinised industry. Even discrepancies in wage payments can be conflated into larger issues but SGR has clearly navigated this intense period better than CWN.
We continue to assume SGR will not pay a dividend in FY22f but may resume distributions in FY23f as gearing falls below 2.5x net debt to EBITDA.
Looking beyond this dark period, we retain our optimism on SGR and our Buy recommendation.
