The Star Entertainment Group Ltd (ASX: SGR) share price traded flat today after the Star Casino operator revealed its profit report for the six-month period ending December 31 2016. Below is a summary of the result.
- Statutory revenue of $1.23 billion, up 11%
- Statutory EBITDA of $300 million, up 56%
- Normalised net profit of $107 million, down 17.7%
- Interim dividend of 7.5 cents per share, up 36.4%
- Net debt of $670 million, up $196 million on June 30 2016 (around 1x trailing EBITDA)
- Plans to invest up to a $1 billion for new Sydney developments
The group's flagship asset is the Star casino, hotel, and entertainment complex near Sydney's CBD and without a competitor it possesses a decent earnings moat and the defensive earnings potential generated by monopoly assets.
However, normalised gross revenues for the Sydney property were marginally down on the prior half as refurbishments and construction works over the period dented revenues. Overall visitor numbers were up 2.8%, but this was offset by a 2.1% lower average spend per customer.
The group also reported some impact from the fallout over the trouble in China for its primary competitor Crown Resorts Limited (ASX: CWN). As a result of a clampdown on Chinese high rollers using Australian casinos to transfer wealth on a fungible basis VIP revenues have been plunging.
The Star Group reporting that turnover at its casinos in November and December was down 27% on the prior corresponding period following the arrest of the Crown staff in China.
Despite, Crown's problems in China it is still investing heavily in constructing a rival casino complex to the Star just across Sydney Harbour and its looming arrival is why Star is choosing to invest heavily in its Star Sydney operations now.
In fact Star has allocated up to $1 billion to construct a new 400-room Ritz Carlton Hotel in Sydney in addition to plans to create a total of 1,000 new hotel rooms by developing new or existing properties.
The Star Group also operates casinos in Brisbane and the Gold Coast that are also beneficiaries of rising inbound tourism and a weaker Australian dollar that encourages locals to holiday at home. Across Queensland normalised revenues and EBITDA delivered a strong result in being up 5% and 9.5% over the pcp.
Outlook
The group reported that it has recorded a strong start to 2017 (excluding the International VIP Rebate business), with plans to trim operating costs in an attempt to produce organic earnings growth ahead.
The heavy investment planned is a reflection of the looming competition from Crown, although for now Star generally occupies an extremely strong competitive position and is an attractive business as a result.
Selling for $5 the stock trades on around 14.7x annualised earnings per share of 34 cents, which looks reasonable value with a dividend yield of around 3%.
