Is Star Entertainment Group Ltd the ASX's best leisure company?

What are the risks of investing in Star Entertainment Group Ltd (ASX:SGR)?

| More on:
a woman

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

I've learned the hard way that one of the most important questions to ask before investing in a company is to ask 'what if?'

The question is broad, but it makes you think about all the things that could go wrong, even if there is only a small chance that they will. As Howard Marks says: "Likely events sometimes fail to occur, and unlikely events sometimes do."

Like when Star Entertainment Group Ltd (ASX: SGR) lost tens-of-millions of dollars to high rolling VIPs playing baccarat. The odds may have been low, but it was a very real probability which came through.

And at $5.82 per share, 'what if?' seems like a good question to ask of Star Entertainment Group Ltd (ASX: SGR) right now. Shares have more than doubled in the last two years and the company's Enterprise Value-to-EBITDA (Earnings Before Interest, Tax, Depreciation and Amortization) ratio of 14 sits at a premium to Crown Resorts Ltd (ASX: CWN) and SKYCITY Entertainment Group Limited-Ord (ASX: SKC) at 13 and 10 respectively.

The price of growth

The premium assigned to Star can be attributed to the big growth prospects investors see in the company. Expanding the Jupiters casino on the Gold Coast and a 50% share in building an iconic resort on Brisbane's Queen's Wharf are great reasons to be excited about future prospects.

Above: Concept design of Star's Brisbane Queen's Wharf development. Source: Company presentation.
Brisbane Queen's Wharf concept. Source: Star Entertainment

This significant growth will require significant capital expenditure. Star anticipates expenditure of $1 billion alone for its share of the game changing Queen's Wharf Brisbane and greenfield projects generally come with more risk than expanding existing operations.

Growing VIP exposure

Another concern though is the extrapolation of current "International Business" demand. This is also referred to as VIP, high-roller or junket business.

According to the Star's half-year presentation "normalised" (average) International VIP business represented 27% of total gross gaming revenues. This was similar for Crown Resorts (28%), and less for SkyCity (17%) over the same period.

But compare this to two years ago where Star was 21%, Crown was 22% and SkyCity was just 7.5%. While it's possible the companies have just become very good at marketing to and catering for these VIPs, the increase also co-insides with the huge downturn in Macau gaming revenues.

Making capital expenditure decisions by extrapolating recent trends can be a complete disaster for investors. The massive capital expenditures by energy companies into LNG five years ago while the price of oil was high is an example. The numbers make sense during boom times, but what happens if demand drops, or supply surges?

In the case of Star Entertainment, what happens if junket business stops like it did in Macau? If local governments start regulating the VIPs, or Macau somehow surges back to life creating competition for the big spenders. The odds of each may be low, but sometimes unlikely events do occur.

Foolish takeaway:

Star Entertainment has a strong long-term growth outlook with several exciting projects. However in my view the company's current valuation already reflects the optimism; pricing in a lot of greed and not enough fear.

Of course the company may continue to perform well in years to come, but before parting with your hard earned cash, be sure to ask yourself 'what if?'

Motley Fool contributor Regan Pearson owns shares of Sky City Entertainment Group Ltd.. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

More on ⏸️ Investing

Close up of baby looking puzzled
Retail Shares

What has happened to the Baby Bunting (ASX:BBN) share price this year?

It's been a volatile year so far for the Aussie nursery retailer. We take a closer look

Read more »

woman holds sign saying 'we need change' at climate change protest
ETFs

3 ASX ETFs that invest in companies fighting climate change

If you want to shift some of your investments into more ethical companies, exchange-traded funds can offer a good option

Read more »

a jewellery store attendant stands at a cabinet displaying opulent necklaces and earrings featuring diamonds and precious stones.
⏸️ Investing

The Michael Hill (ASX: MHJ) share price poised for growth

Investors will be keeping an eye on the Michael Hill International Limited (ASX: MHJ) share price today. The keen interest…

Read more »

ASX shares buy unstoppable asx share price represented by man in superman cape pointing skyward
⏸️ Investing

The Atomos (ASX:AMS) share price is up 15% in a week

The Atomos (ASX: AMS) share price has surged 15% this week. Let's look at what's ahead as the company build…

Read more »

Two people in suits arm wrestle on a black and white chess board.
Retail Shares

How does the Temple & Webster (ASX:TPW) share price stack up against Nick Scali (ASX:NCK)?

How does the Temple & Webster (ASX: TPW) share price stack up against rival furniture retailer Nick Scali Limited (ASX:…

Read more »

A medical researcher works on a bichip, indicating share price movement in ASX tech companies
Healthcare Shares

The Aroa (ASX:ARX) share price has surged 60% since its IPO

The Aroa (ASX:ARX) share price has surged 60% since the Polynovo (ASX: PNV) competitor listed on the ASX in July.…

Read more »

asx investor daydreaming about US shares
⏸️ How to Invest

How to buy US shares from Australia right now

If you have been wondering how to buy US shares from Australia to gain exposure from the highly topical market,…

Read more »

⏸️ Investing

Why Fox (NASDAQ:FOX) might hurt News Corp (ASX:NWS) shareholders

News Corporation (ASX: NWS) might be facing some existential threats from its American cousins over the riots on 6 January

Read more »