Star Entertainment Group operates integrated resorts with gaming, entertainment and hospitality services. Star also manages the Gold Coast Convention and Exhibition Centre on behalf of the Queensland government and invests in a number of strategic joint ventures. Shares in Star are materially undervalued versus our unchanged $1.20 fair value estimate post the company’s first-half FY24 result. Granted, there are headwinds – remediation costs weigh on profitability, and VIP gaming is suspended. We expect the suspension to persist through FY24 as Star focuses on proving it is suitable to hold its casino licenses, following the launching of a second inquiry by the NSW regulator.
We expect Star to eventually prove suitability and ultimately retain its casino licenses. With no more geographic exclusivity, competition is also proving intense, and Crown Sydney has gained from disruption to Star’s Sydney casino, winning market share since opening its gaming floor on the other side of Darling Harbour in early FY23. In our view, investors are too focused on the troubled near-term, and are overlooking Star’s earnings potential as conditions normalise. We expect earnings to recover from FY25 as operational restrictions ease, VIP players begin to return, and main-floor table gaming further recovers. There are two major sources of uncertainty, however, for which investors should require a high margin of safety for investment – the size of the Austrac fine and the eventual outcome of the Sydney casino license review. New debt facilities of $450 million with more flexible covenants, as part of the FY24 recapitalisation, mean Star has plenty of headroom to pay its penalties and see through lower near-term earnings.