JP Morgan - Maintaining Overweight PT $6.10, page-2

Investment Thesis, Valuation and Risks

Star Entertainment Group Limited (Overweight; Price Target: A$6.10)

Investment Thesis

Retain Overweight. SGR has seen defensive, stable and transparent domestic earnings growth and has invested strategically in expansion and refurbishment in the domestic market. SGR’s domestic gaming offers a high-margin, predictable and recurring portion of earnings, and the company is delivering on initiatives to improve the domestic offering by reinvesting in the customer and driving tourism through product and loyalty. We expect to see continued earnings growth, particularly from its projects in Brisbane and the Gold Coast, coupled with disciplined capital allocation. SGR is now the preferred destination for VIP turnover in Australia with significant momentum. Investing in the domestic offering via loyalty programs/JV is expected to drive strong earnings growth starting in 2H19. Queens Wharf and hotel room expansions remain the key long term drivers, although increased capex and regulations remain risks. We note the risks surrounding VIP volatility, but we believe SGR remains the better-performing Australian casino operator in VIP play.

Valuation

Our share price target to Dec-19 remains at A$6.10 per share, based on our SOP (A$5.48) valuation, rolled forward to Dec-19 at SGR’s cost of equity and adjusted for dividends where appropriate. We calculate our SOP valuation based on the individual cash flow streams of each business segment. Our group post-tax WACC is 8.2%. The key figures that make up this discount rate are a cost of equity of 9.7% and a post-tax cost of debt of 3.7%. We apply a Beta of 0.95 within this calculation.

Risks to Rating and Price Target

Key downside risks to our OW rating and price target include a retraction of consumer spending and/or a shift in HDI gaming allocation, continued volatility and low-margin revenue from international VIP clients and a potential structural decline in VIP revenue. SGR is susceptible to delays or unanticipated costs associated with its refurbishment/ growth strategy. If expansion projects are not completed or face unexpected headwinds from legal issues, this could have material impacts on earnings. There is also the ongoing risk of regulatory changes in the gaming industry and the upcoming construction and opening of CWN’s casino in Barangaroo.

	Star Entertainment Group Limited
1	A$ in millions, year end Jun
2	Profit And Loss	FY17	FY18	FY19E	FY20E	FY21E
3	Revenue	2,337	2,695	2,818	2,971	3,102
4	Revenue growth	(3.9%)	15.3%	4.6%	5.4%	4.4%
5	COGS	(1,822)	(2,107)	(2,191)	(2,316)	(2,418)
6	Operating Expenses	0	0	0	0	0
7	EBITDA	515	588	627	656	685
8	EBITDA growth	(7.4%)	14.2%	6.7%	4.5%	4.4%
9	EBITDA margin	22.0%	21.8%	22.3%	22.1%	22.1%
10	Amortisation	-	-	-	-	-
11	Depreciation	(165)	(187)	(206)	(199)	(205)
12	EBIT	351	401	422	457	480
13	Other Income	-	-	-	-	-
14	Other Expenses	-	-	-	-	-
15	Net Interest	(42)	(34)	(38)	(37)	(43)
16	Pre-Tax Profit	308	367	383	419	437
17	Tax	(94)	(108)	(115)	(126)	(131)
18	Tax Rate	30.4%	29.6%	30.0%	30.0%	30.0%
19	Minorities	0	0	0	0	0
20	Abnormals (post tax)	50	(110)	0	0	0
21	Reported NPAT	264	148	268	293	306
22
23	Normalised NPAT	215	258	268	293	306
24	Growth	(11.1%)	20.3%	4.0%	9.3%	4.1%
25
26	End of Period Shares	826	845	917	917	917
27	EFPOWA	828	846	917	917	917
28
29	Reported EPS ($)	0.32	0.18	0.29	0.32	0.33
30	Normalised EPS ($)	0.26	0.31	0.29	0.32	0.33
31	Growth	(11.1%)	17.6%	(4.2%)	9.3%	4.1%
32
33	DPS ($)	0.16	0.20	0.23	0.24	0.25
34	Growth	23.1%	28.1%	9.8%	6.7%	4.2%
35
36	DPS/EPS payout	50.1%	117.1%	76.9%	75.0%	75.0%
37
38	Cash Flow Statement	FY17	FY18	FY19E	FY20E	FY21E
39	Net Profit for Cashflow	264	148	268	293	306
40	Depreciation & Amortisation	165	187	206	199	205
41	Non Cash Items	-	-	-	-	-
42	Working Capital Changes	(3)	9	38	3	6
43	Other Operating Cashflows	47	53	40	39	44
44	Cashflow from Operating Activities	473	397	551	534	561
45
46	Capex	(408)	(476)	(326)	(321)	(230)
47	Net Acquisitions	(184)	(77)	(110)	(200)	(175)
48	Other Investing cashflows	0	0	0	0	0
49	Investing Cash Flow	(592)	(552)	(436)	(521)	(405)
50
51	Inc/(Dec) in Borrowings	250	(249)	128	241	113
52	Equity Issued	0	489	0	0	0
53	Dividends Paid	(124)	(132)	(204)	(216)	(225)
54	Other Financing Cashflows	(53)	43	(40)	(39)	(44)
55	Financing Cash Flow	73	152	(115)	(13)	(156)
56
57	Net Cash Flow	(45)	(3)	0	0	0
58
59

	Relative recommendation:			Overweight
1
2	Valuation Summary				A$m	A$ps
3	Current mkt capitalisation				4,100.43	4.47
4
5	Price Target					6.10
6	Capital growth to price target					36.5%
7
8	Trading Multiples	FY17	FY18	FY19E	FY20E	FY21E
9	PE Pre-abnormals	17.2	14.7	15.3	14.0	13.4
10	PE Reported	14.0	25.5	15.3	14.0	13.4
11	EV/EBITDA	9.7	8.1	7.8	7.9	7.7
12	EV/EBIT	14.3	12.0	11.7	11.3	11.0
13
14	Key Ratios	FY17	FY18	FY19E	FY20E	FY21E
15	Dividend Yield	3.6%	4.6%	5.0%	5.4%	5.6%
16	Franking	25.0%	100.0%	100.0%	100.0%	100.0%
17	Return on Assets (%)	4.5%	5.0%	5.0%	5.2%	5.1%
18	Return on Equity (%)	6.7%	7.3%	7.0%	7.6%	7.7%
19	ROIC (%)	-	-	-	-	-
20
21	Leverage	FY17	FY18	FY19E	FY20E	FY21E
22	Gearing (Net Debt / Equity)	28.4%	18.8%	21.8%	27.5%	29.8%
23	Gearing (ND / (ND + E))	22.1%	15.8%	17.9%	21.6%	22.9%
24	Net Debt / EBITDA	180.8%	120.7%	133.5%	164.5%	174.0%
25	EBIT Interest Cover (x)	8.4	11.7	11.0	12.2	11.1
26
27	Balance Sheet	FY17	FY18	FY19E	FY20E	FY21E
28	Cash	114	110	110	110	110
29	Receivables	193	222	231	244	254
30	Investments	-	-	-	-	-
31	Inventories	12	16	14	15	15
32	Other Current Assets	109	49	49	49	49
33	Total Current Assets	428	396	404	418	428
34	Net PPE	2,361	2,659	2,785	2,915	2,956
35	Total Intangibles	1,852	1,859	1,853	1,844	1,828
36	Other Non Current Assets	375	358	468	668	843
37	Total Non Current Assets	4,588	4,875	5,105	5,427	5,627
38	Total Assets	5,015	5,271	5,509	5,844	6,055
39	Creditors	325	366	412	428	445
40	Current Borrowings	130	134	134	134	134
41	Current Tax Provisions	-	-	-	-	-
42	Other Current Provisions	67	65	65	65	65
43	Other Current Liabilities	68	25	25	25	25
44	Total Current Liabilities	589	589	635	651	668
45	Non Current Creditors	0	0	0	0	0
46	Non Current Borrowings	915	686	814	1,055	1,168
47	Deferred Tax Liabilities	188	176	176	176	176
48	Other Non Current Provisions	10	13	13	13	13
49	Other Non Current Liabilities	37	25	25	25	25
50	Total Non Current Liabilities	1,150	900	1,029	1,270	1,382
51	Total Liabilities	1,740	1,489	1,663	1,921	2,050
52	Equity	2,581	3,070	3,070	3,070	3,070
53	Other Equity	0	0	(0)	(0)	0
54	Reserves	(7)	(7)	(7)	(7)	(7)
55	Retained Profits	702	718	783	861	941
56	Outside Equity Interests	0	0	0	0	0
57	Total Shareholders Equity	3,276	3,782	3,846	3,924	4,005
58	Net Debt	931	710	838	1,079	1,191
59