COVID and its associated government restrictions wrecked Star Entertainment’s first half result, but the recovery is on its way and should be brisk.
In January, SGR pre-released the basic details of its 1H22 result, so the formal figures announced this week held few surprises. The Sydney and Queensland properties were subjected to a gauntlet of closures and restrictions that resembled a corporate hokey-pokey dance. Encouragingly, revenue trends so far this year are much more positive although still hampered by higher costs in the form of labour supply challenges (thanks, Omicron) and rising inflation seeping into wages (EBA +5% in FY22 compensating for no increase in FY21). These cost issues should eventually normalise as border openings allow unrestricted movement of people.
In the first few weeks of 2022, Sydney revenue is up 20% compared to last year with gaming revenue up 7% and non-gaming revenue surging 46%. Queensland is less vigorous with revenue down 6% as gaming revenue declined 12% but is offset by a 32% lift in non-gaming revenue.
SGR is not perfect. It is facing an AUSTRAC enforcement investigation and an ILGA review of The Star Sydney (report due June 2022). But the scrutiny on SGR has paled in comparison to the drubbing dished out to Crown Resorts over the last 18 months and counting. Even if CWN’s ownership is about to change hands, the oversight of its operations will not go away for some time. CWN is expecting to spend $150 million on corporate costs (legal and consulting fees) in FY22 alone. In contrast, SGR has diligently co-operated with regulatory authorities over its compliance and regulatory processes, and this has shown that the company has mostly behaved appropriately.
Regardless, SGR is still facing a stern challenge in Sydney against Crown Sydney. We think SGR’s private gaming room revenue could be impacted by about one third once Crown Sydney begins its gaming operations. We expect minimal impact for The Star’s main gaming floor and its VIP operations which are now limited to direct relationships and no junket players. SGR sold its VIP jet for about $40 million in 1H22.
Pre-COVID, The Star Sydney’s EBITDA in FY19 was $368 million. With less VIP play and a chunk of PGR lost to Crown Sydney, we think EBITDA for this property can recover to above $300 million in FY23f. Overall, Crown Sydney may have an impact on The Star Sydney in the order of $30-35 million EBITDA, or about 10% of EBITDA. This proportion should fall once
The Star Sydney is granted its additional 1,000 EGMs which should generate approximately $65-70 million EBITDA pa.
SGR’s extensive property development projects have avoided much of the commotion and are close to completion in some cases.
The new Dorsett Hotel on the Gold Coast opened on 26 December 2021 and Tower 2 is on schedule to open in FY25. The latter is enjoying strong apartment pre-sales success.
The giant Queens Wharf Brisbane project (SGR 50%) is expected to open progressively from mid-CY23, and SGR has agreed to sell an interest in the Treasury Brisbane assets for $248 million. The company is still working on a partial sale and leaseback of a minority holding in The Star Sydney property.
SGR’s big capex cycle is beginning to slow down with group capex in FY22f expected to be $125-150 million and about $175 million in FY23f. The timing could be quite fortuitous as the domestic and international border re-openings allow for much needed customers to re-visit Queensland to find some brand new, high quality tourism destinations to try out.
Investment view
SGR’s share price has been stalled by the COVID interruption to earnings, but importantly this has not permanently damaged the franchise value. We continue to emphasise the premium nature of SGR’s assets which are long-term, quasi-monopolistic and cash generative. SGR’s hard asset base (freehold land, buildings and leasehold improvements) are worth more than $3 billion on their own or about $3.20 per share.
No dividend will be paid in FY22, but we assume a resumption in 1H23f once lender covenants have been satisfied.
Although there are risks to the earnings recovery if COVID makes a return, we think SGR’s share price is reflecting on overly pessimistic outlook or simply not allowing for a recovery at all.
Risks to investment view
The earnings recovery depends on unfettered access for customers with no restrictions. Higher inflation and general costs could become more permanent than thought and this would also affect earnings growth.
Recommendation
We have retained our Buy recommendation.
