2H18 trading update
At the investor day on 28th May 2018, The Star Entertainment Group (SGR) provided an update on their performance for the period from 1 January to 23 May.
Total normalised gross revenue is up 16.4% compared to the previous corresponding period (pcp). Meanwhile, domestic gaming revenue growth has been affected by lower table hold rates and is up just 2.6% on the pcp which is below our forecasts. Using constant hold rates it is up 6.8% on the pcp and we would anticipate the lower hold rate to normalise over the coming periods.
VIP was very strong and turnover is up 63.7% on the pcp (well ahead of our forecasts and the business has maintained the strong momentum in 2H18). The actual win rate is below the theoretical win rate of 1.35%, but up on the 1H18 win rate of 1.06%.
Significant growth expected in premium Chinese travelers
In addition to the presentations by SGR throughout the day, Patrick Tsang, Chief Executive Officer of Chow Tai Fook Enterprises (CTF), highlighted the significant database (6 million members) and contacts it currently has which SGR could look to leverage. In 2016 there were 5 million high value premium Chinese travelers to Australia and they expect this to increase to 16 million in 2021 and 35 million in 2026 which bodes well for SGR.
Additionally, CTF expressed its intention to increase its position in SGR to 19.9% (from 9.99% currently) with Joint Venture partner Far East, assuming it receives regulatory approval to do so. If this were to occur it should help support the share price.
South East Queensland economy and Queen's Wharf update
SGR flagged the positive fundamentals of the South East Queensland (SEQ) market, with high inbound tourism, strong jobs growth and high median household income relative to property prices. The company also noted favourable gaming taxes relative to other casinos. While the long term outlook for the SEQ economy is positive, SGR did flag an increase in the capex cost of Queen's Wharf from A$1.8bn to $2.4bn. Of the A$600m increase, A$350m of it is to fund a 25% increase in the gross floor area which should increase project economics with the other A$250m attributed to cost escalation.
We continue to believe that The Star Entertainment Group (SGR) is well placed to reward investors with growing EPS and DPS ahead of the Queen's Wharf project opening in FY23. Risks to our valuation include the global economic environment, a reduction in consumer spending, competition and regulatory changes.
We retain our Add recommendation.
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