4 things to know before buying Star Entertainment Group Ltd shares

Shares in gaming and resort operator Star Entertainment Group Ltd (ASX: SGR) have had a great year so far in 2016, climbing 19% and smashing the 4% growth of the S&P/ASX 200 (INDEXASX: XJO).

But how does this compare to the company’s full year results announced last week? Here are five things that you should know before buying the company today:

1. Financial numbers trending in the right direction

Although reported revenue was up 6% for the 12 months to 30 June 2016, control over costs helped to produce a 15% lift in net profit after tax (NPAT) and earnings per share. Return on equity was also up slightly from 5.6% to 6.2% and the company continued to pour cash into capital expenditure which will continue to show up on the Income Statement as depreciation in the coming years.

2. Five consecutive years of dividend growth

Star Entertainment’s final dividend was raised to 7.5 cents per share (cps), bringing the total dividend for the year to 13 cps (fully franked). This marks the fifth consecutive year of dividend growth and at Star Entertainment’s current share price it yields 2.1%.

By comparison SkyCity Entertainment Group Limited-Ord (ASX: SKC) yields 4.2% at current exchange rates and Crown Resorts Ltd (ASX: CWN) yields 5.4%.

It’s worth noting however that Star Entertainment’s dividend represents a payout ratio of just 55%, compared to Crown Resorts’ new policy of paying out 100% of normalised net profit after tax.

3. FY17 Outlook

Star Entertainment, quite like SkyCity Entertainment, is going through a period of significant capital expenditure as it upgrades its Sydney casino, and begins investing into its significant new Brisbane casino joint venture.

This expense and disruption to the company’s businesses is expected to hold back earnings growth in the short term, but additional hotel rooms and non-gaming entertainment options should add value over the long term.

4. Are shares a bargain?

I’m wary in general at the moment that there is a lot of money chasing companies with strong growth outlooks. Star Entertainment doesn’t seem hugely overpriced at 12x EV/EBITDA (Enterprise Value/Earnings Before Interest, Tax, Depreciation and Amortisation), but nor does it appear to offer much margin for error if economic conditions stumble at any point in the next few years while the company is trying to fund considerable growth projects.

I’ll be watching the company for an opportunity to buy shares at a more compelling price.

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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.

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