Star Entertainment Group
On Tuesday (11th June), Star Entertainment Group (ASX: SGR) provided an update regarding its expected earnings of fiscal year 2019 (FY2019). According to the release, domestic revenue growth trends across its Star properties had softened. Domestic revenue between January 1 and June 8 gained only 0.3% against the prior corresponding period, and total domestic revenue in FY 2019 year to date was up 3.1% against the prior corresponding period.
The Star operates casinos in Sydney, Brisbane and the Gold Coast and have a heavy reliance on revenue from high-roller gambling. The Star explained that it was faced with challenging macroeconomic headwinds in the market and the decline in the holding rate of table games in private gaming rooms (PGRs) had resulted in the slowdown of domestic revenue. The Star also blamed the impact of “disruption from capital works” at its Sydney site for its soft numbers. In addition to this, the company added that healthy International VIP trends from the first half of FY 2019 have continued in the second half. International VIP turnover has declined 31.1% in the second half of 2019. The Star commented that this was due to the sharp decline (16.5%) in ‘front money’ against prior corresponding period, the drop in the turning rate (9.5 times vs 11.3 times in the previous), a lower ‘win rate’ (below the 1.35% theoretical win rate) and a 7.6% increase in unique patrons. In view of the revenue growth rates, company management expects a normalised EBITDA in FY 2019 to be $550 million to $560 million. In comparison, EBITDA in the fiscal year of 2018 was $568 million.
Following the group’s soft financial report, it is reported that Star Entertainment will cut 400 jobs within the coming days. Moreover, the plummet in Star’s VIP spending at casinos was drawing concerns for the Crown’s Barangaroo Sydney casino. Although the market already knew the VIP segment had been soft, the extent of the weakness caught investors by surprise. In the morning on 11 June, the share price of the Star was down over 16% to a multi-year low of $3.77. The bearish trend has influenced the industry with shares in both Crown Resorts Ltd (ASX: CWN) and SKYCITY Entertainment Group Limited (ASX: SKC) had decreased.
Cost management initiatives and Capital developments
On the other hand, cost management initiatives are expected to bring meaningful cost savings. The previously announced center in Gaming and Marketing would contribute to the capability, processes and decision-making improvement of the company. These improvements would provide an allowance for the integration of functions and opportunities to save material costs in non-customer-oriented business. Based on this, the company revealed that its goal is to save $40 million to $50 million by the end of the first quarter of fiscal year 2020.
Looking forward, the capital development program of the Star will continue as planned. The company mentioned that the excavation of Queen’s Wharf in Brisbane is expected to be completed in July 2019, in line with schedule. The cost of this phase of the project is slightly lower than the budget and the completion of the fit-out works is expected in the middle of 2020. Another site, the Star Gold Coast is under construction and is forecasted to be completed in FY 2022. Upgrade and expansion of Sovereign Resorts at the Star Sydney continues, with completion is remaining on track for mid-2020.
Australia’s Gambling industry amid the U.S.-China trade war
The escalating trade tensions between the U.S. and China have brought a negative impact all over the world. China has recorded its lowest rate of growth in the near three decades. Australian casino giants including Star Entertainment and the James Packer-backed Crown Resorts have experienced a sharp decline in revenues as the U.S.-China trade war has taken a toll on the number of Asian high-rollers visiting the gambling venues.
David Fabris, research gaming analyst from Macquarie, indicated that the overall result of domestic business was “disappointing”. He said the softening was due to challenging macroeconomic conditions. Matt Bekier, the chief executive of Star, suggested that confidence among the super-rich VIPs was lower. He added that some “large customers” are now only spending one or two days at the casino, instead of a whole week as before. Mr Bekier even sold 200,000 shares in late April. Last week, the RBA cut the rate and this was explained to stimulate the economy. Mr Bekier indicated that the rate cuts sent the signal that “the economic outlook for Australia is relatively bleak”. On May 31, Credit Suisse commented that the economic issues are weighing in on the main gaming floor.
In the medium term, macroeconomic conditions will place more pressure on Australia’s Gambling industry. The Star needs to prepare and continue its cost management initiatives and capital developments in order to cater for macroeconomic headwinds.
By Steven Gao
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