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The Star Entertainment share price is down 8% YTD: is it a buy?

The Star Entertainment Group Ltd (ASX: SGR) share price is down 8% in 2019 so far. Here’s why I think it’s a good time for investors to buy Star shares.

Background on Star Entertainment Group

The Star Entertainment Group is an entertainment provider that operates casinos in New South Wales and Queensland. Its assets are in Sydney, the Gold Coast and Brisbane. The group has a market cap of $3.78 billion.

Why I think it’s a buy

The Star Entertainment Group has a price-to-earnings (P/E) ratio of 23.50 against the ASX 200, which has a P/E ratio of 18.39 at the time of writing. While this may seem high initially, the group is posting revenue growth and is set to increase earnings. This will reduce the P/E ratio.

The group also has a handsome grossed-up dividend yield of 7.1%, a great return against a cash rate of 1%. Additionally, it has increased dividends for the 2019 financial year. These payments show that management are eager to return cash to shareholders, and the group also has healthy cash flow to continue paying dividends.

There are a number of other positive factors that make this a strong potential buy. Earnings for the first half of the 2019 financial year were a new record for the company and saw high cash generation. This was largely due to increased revenue from slot machines and gaming tables. Results from its VIP business were mixed but offer room for considerable further growth.

The group trades on a price-to-book ratio of 1. This can be considered a bargain when taking into account that its audited book value is equal to its share price. Further, the group’s Gold Coast business is still relatively new so it has room to expand, which will help the company generate higher returns on its equity.

The Star Entertainment group has a debt-to-equity ratio of 21.7%. This is relatively low for a large company and easily sustainable by the group’s earnings. Additionally, while earnings may fluctuate, gambling revenue can ensure that the group is steady and able to maintain its debt.

Foolish takeaway 

The Star Entertainment Group has a handsome dividend yield and room for considerable growth. It has manageable debt and trades on a low price-to-book ratio. I think it’s a buy.

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Motley Fool contributor Chris Chitty has no position in any of the stocks mentioned. 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 Scott Phillips.

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