Star cuts guidance
Recommendation
Star Entertainment has lowered its 2019 forecast for operating earnings to $550m-560m due to reduced turnover from international VIPs. Domestic revenue has been flat since the release of the company's interim result, though international VIP revenue has fallen some 31%. Management blamed a combination of factors, including general economic conditions and disruption from construction works at The Star Sydney.
As we explained in Star Entertainment: the downside of good luck, the company has its share of risks. Regulatory changes are an ever-present threat and Star is also highly exposed to Australian tourism movements and the flow of wealthy Chinese gamblers. This latest downgrade is a case in point.
While this news isn't a particular cause for alarm and volatile earnings are to be expected for this business, we're reducing our price guide to allow for wiggle room should the Australian and Chinese economies continue to slow. Star is a long way from being overpriced - on a price-earnings ratio of 15 based on consensus estimates for 2019 - but given limited medium-term growth prospects, there isn't a wide enough margin of safety to get us salivating either. HOLD.
Note: The Intelligent Investor Equity Growth and Equity Income funds own shares in The Star Entertainment Group.