Star Entertainment to benefit from Crown woes

Star Entertainment is likely to benefit from expected delays to Crown Resorts’ ability to open a casino in Sydney and its current share price presents a good buying opportunity, J.P. Morgan said in a report. 

The firm said it has upgraded its rating on Star to “overweight” due to three main drivers. The company has plans to reduce debt, the competitive environment in Sydney is favourable given likely delays to Crown’s license and its loyalty program and streamlined operating model will boost margins.

Rival Crown opened its new property in Barangaroo in Sydney in December, but was not permitted to operate the casino pending the results into an inquiry into its suitability. The results of that report are pending publication in the next two weeks and J.P. Morgan says it expects a temporary finding of “unsuitability” with risks persisting into 2022.

The firm said Star’s share price is trading at a significant discount to Crown on a price/earnings basis at 19.3 x compared with 26.

It said it expects management to continue to reduce Star’s cost base and capex levels to position itself into FY22 and sees an attractive runway for earnings post-COVID-19.

Both companies are expected to report their results for the first half of fiscal 2021 on Feb. 18.

J.P. Morgan points out that operating leverage and cost management have been key focus areas for Star’s management in 2020 and previous years and these efforts are likely to bear fruit in the upcoming results.

The firm said Sydney continues to feel the pinch from pandemic-mandated restraints, but overall group domestic revenue is likely to be around 75 percent of the previous calendar year. 

“We model total table revenues of $191.5 million in 1H21,” it wrote in a report. “While this is a 37.8 percent decline vs the pcp, we are modelling a 31.6 percent increase sequentially vs 2H20.”