Expanding the strategic partnership
The Star Entertainment Group (SGR) has expanded its strategic partnership with Chow Tai Fook Enterprises Limited (CTF) and Far East Consortium International Limited (FEC) which will jointly pursue and participate in significant growth developments at or adjacent to The Star's properties to increase their appeal as large scale, destination integrated resorts. Additionally, a marketing alliance has been established to drive incremental tourism to SGR's properties.
With the partners injecting equity capital
SGR has entered into a share subscription agreement with CTF and FEC whereby each party will acquire 45.8m shares at a price of A$5.35 per share. This will result in each party holding a 4.99% position in SGR. CTF and FEC have also applied to the relevant authorities to increase their aggregate shareholding to over 10%. Post receipt of funds, SGR's LTM leverage ratio (ND/EBITDA) will decline from 2.1x to 1.2x.
A new dividend policy to reward current investors
The Board's current outlook for the group and the enhanced capital light growth strategy has resulted in a change to the dividend policy. From the FY18 final dividend the new policy will be a minimum of 70% of normalised NPAT (from 50% of statutory NPAT). We have assumed a 75% payout ratio for 2H18, FY19 and FY20 dividends.
Consequently we now forecast dividends of 17.5cps for FY18, 22.5cps for FY19 and 23.5cps for FY20.
After diluting for the new shares issued, allowing for minor forecast changes and rolling forward our DCF, our valuation and share price target have been reduced slightly (Morgans clients can login to view).
We believe SGR is well positioned to deliver solid earnings growth and an attractive income stream to investors. Risks to our valuation include the global economic environment, a reduction in consumer spending, competition and regulatory changes.
We retain our Add recommendation.
Morgans clients can login to view our detailed report and revised share price target for The Star Entertainment Group (SGR). Alternatively, please contact your Morgans adviser or nearest Morgans office for access.
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