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Credit Suisse: Star Entertainment Group Ltd shares are a buy 

Star Entertainment Group Limited (ASX: SGR) shares were up almost 4% on Wednesday afternoon after broker Credit Suisse upgraded the Australian gaming and entertainment company to “Outperform” from “Neutral”. 

The broker said the stock looks inexpensive at current levels despite a reduction in its EPS forecasts following changes to its valuation model. 

“SGR is trading slightly below its traditional EV/EBITDAx of 8.7x to 9.0x (FY19E),” Credit Suisse said in a research note.  

“If SGR can meet FY18 consensus earnings in August with a positive trading outlook, we believe the stock is likely to rally and support a multiple at the higher end of the range.”  

Credit Suisse is also forecasting mid-single digit EPS growth over the next two years, driven primarily by Star Entertainment’s Gold Coast expansion. 

Star Entertainment owns and operates The Star Gold Coast casino and hotel venue.  

In late March, the group announced an expanded strategic agreement with its two Hong Kong-based joint venture partners, leisure conglomerate Chow Tai Fook Enterprises Limited and property development firm, Far East Consortium International Limited for the development of the venue, along with its other properties in Sydney and Brisbane. 

Under the move, there are plans to build five new towers for hotel, residential, gaming and retail development at The Star Gold Coast precinct. 

The expanded partnership with Chow Tai Fook Enterprises and Far East Consortium International and the associated $490 million placement was one of the factors behind the adjustments to Credit Suisse’s valuation model for Star Entertainment. 

Changes also related to the fact that both Star Entertainment’s 2H VIP revenue and Sydney VIP commissions had been running higher than modelled and as the group’s Brisbane casino EBITDA – disclosed at the group’s 1HFY18 result – was materially below the broker’s forecast. 

Credit Suisse lowered its target price from $5.90 to $5.60 following a reduction in its FY19 and FY20 EPS forecasts by about 6-7%. It said the new target price is consistent with its 9.0x FY20 estimated EBITDA.  

It also noted that investors remained concerned about the execution of the Sovereign Room refurbishment at Star Entertainment’s Star City casino in FY19 and FY20.  

“The Sovereign Room is about 20% of Sydney casino revenues, Credit Suisse is modelling flat private gaming room revenue over that period in the Sydney casino,” it said. 

On Wednesday afternoon, Star Entertainment Group Limited shares were up 3.9% to $5.24. Peers Crown Resorts Ltd (ASX: CWN) and SKYCITY Entertainment Group Limited (NZE: SKC) were up 1.57% to $12.95 and 0.77% to NZ$3.95, respectively. 

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