Following on from fellow casino owner Crown Resorts (ASX: CWN) reporting a strong result earlier this month, today it was Star Entertainment’s (ASX: SGR) turn to report a good result.
And like Crown, the highlight was growth in VIP revenue as VIPs returned to Australia after the arrest of Crown’s employees in China two years ago.
VIP turnover rose 54% overall but the highlight was the 57% rise, to $52.5bn, at The Star, Sydney, making the latter the most popular destination for VIPs amongst the casinos of Australia and New Zealand.
Unfortunately for the company, though, VIPs continued their lucky streak. Star Entertainment’s actual win rate on VIP revenue was only 1.27% in the second half of 2018 which, despite being an improvement on the 1.06% in the first half, is still below the theoretical win rate of 1.35%.
(Due to the large amounts VIPs bet, casinos normalise VIP revenue to reflect the theoretical rather than actual win rate to reduce earnings volatility. The most popular game played by VIPs is baccarat, which has a theoretical house advantage of 1.35%).
Over the long term, though, we’d expect VIPs’ good and bad luck to even out and for Star Entertainment to earn close to the 1.35% theoretical win rate.
On a normalised basis, VIP revenue rose 52%, far in excess of the 4% rise in domestic gaming revenues (which include revenue from pokies, main gaming floor tables and non-gaming).
However, the increase in VIP revenue was also the main contributor to a 26% increase in gaming levies, taxes and commissions, with normalised earnings before interest and tax (EBIT) rising 14%, to $401m. Normalised net profit after tax (NPAT) rose 20%, to $258m.
Although dividends are paid out of actual NPAT and retained profits – and statutory NPAT fell 44%, to $148m – investors were rewarded with a much higher final dividend of 13 cents per share (compared to 8.5 cents in the prior corresponding period).
Total dividends paid for 2018, at 20.5 cents per share, are 28% higher than the 16 cents per share paid in relation to 2017.
Sydney still dominates
Overall, nearly three quarters of Star Entertainment’s 2018 normalised EBIT was generated from its Sydney casino.
And Sydney is likely to continue to dominate Star Entertainment’s earnings for a few more years yet. While the company is building a new, larger casino in Brisbane that is due for completion in the second half of 2022, Star Entertainment will only own half of the new casino in comparison to its 100% ownership of the existing Brisbane casino.
As such, this potentially presents a problem once Crown Sydney opens in 2021. Billed as “VIP-only”, in reality the ease in which one can become a member and the minimum bet limits ($20 per hand of blackjack, $25 for roulette and $30 for baccarat) mean Crown Sydney could prove a strong competitor to The Star, Sydney.
So with Star Entertainment trading on an enterprise value to normalised EBITDA multiple of 9.4, we think there is better value elsewhere.