The Star Entertainment Group (formerly Echo Entertainment Group) has reported a decent set of numbers for the year to June with net profit up 15% to $194m. The result, however, was anchored by a few lucky VIPs clocking up some big wins which led to a below average win rate of 1.2%.
Luck, though, is unsustainable; the house will make up for it in the long term. If we even out the short-term volatility of winnings by using the theoretical win rate of 1.35% that the casino expects over the long term, underlying net profit rose an impressive 23% to $241m.
|Year to June||2016||2015|| /(–)
|U'lying EBIT ($m)||392||323||21|
|U'lying net profit ($m)||241||196||23|
|Final dividend||7.5 cents (up 25%),
fully franked, ex date 31 Aug
What's more, revenue increased 6% to $2.4bn thanks to an 8% rise in revenue at The Star Sydney casino – which accounts for 70% of total revenue – while non-gaming revenue was up 3%. This was pleasing because the associated hotel is undergoing significant refurbishments, which disrupts customer visits (see Star continues to shine). Management noted that the refurbishments are progressing more slowly than anticipated but are still within budget.
The company’s Gold Coast and Treasury Brisbane casinos had a harder time, with a decline in revenue at Gold Coast more than offsetting a small rise at Treasury, again due to refurbishments. Management noted that the initial customer response to the new restaurants and hotel rooms has been pleasing.
Star Entertainment’s normalised earnings before interest, tax, depreciation and amortisation (EBITDA) rose 14% to $556m. Margins widened due to decreasing costs as a proportion of revenue, though this was partially offset by higher average gaming taxes at The Star Sydney.
Management didn’t provide specific profit guidance for 2017 but did note that revenue was up 4% in the first seven weeks of the financial year and that the VIP win rate was in line with expectations. With a clean balance sheet, excellent real estate and improving operational performance, we’re raising the price guide slightly and continue to recommend you HOLD.