Crown Resorts Aussie Pain is Star Entertainment Gain, Says JPMorgan

Posted on: February 3, 2021, 09:28h. 

Last updated on: February 3, 2021, 01:11h.

Todd Shriber @etfgodfather Read More
Expertise: Financial, Gaming Business, Mergers and Acquisitions.

Lingering regulatory controversy impeding Crown Resorts from opening an integrated resort in Sydney is a boon for rival Star Entertainment Group, according to JPMorgan analysts.

Star Entertainment
The Star Sydney, seen here. JPMorgan sees Star Entertainment topping Crown Resorts over the near-term. (Image: The Guardian)

The bank upgraded shares of the Star Gold Coast operator to “overweight,” citing several tailwinds while pointing out the stock trades at a noticeable discount to Crown.

Crown Resorts opened its highly anticipated Barangaroo in Sydney last December. But the casino at the $1.6 billion venue isn’t operational, pending a regulatory inquiry into the operator’s suitability to hold gaming licenses.

The results of the investigation are due out in the next two weeks, and it’s possible the ILGA will return a ruling of “unsuitability,” meaning risks around the venue will linger into next year, according to the JPMorgan analysts.

Star Entertainment Could Shine

With the fate of Barangaroo’s gaming operations still up in the air, JPMorgan sees a favorable competitive environment in Sydney for Star, where the company operates Star Sydney.

“Home to The Darling — the only luxury hotel in NSW to be awarded a Forbes 5-Star rating (and recognized for three consecutive years), it also features the award-winning $100-million The Star Event Centre,” according to Star.

Another catalyst in the eyes of JPMorgan is Star’s debt reduction plans. The company had $2.34 billion in total liabilities as of June 2020, according to Wall Street Journal data. At the height of Australia’s coronavirus shutdown, Star trimmed $10 million a month in operating expenses.

That more efficient operating model, coupled with a revamped loyalty program, could lead to higher margins, notes JPMorgan.

The bank adds shares of Star, which added almost four percent on news of the upgrade, trade at a price-to-earnings ratio (P/E ratio) of 19.3x, a noticeable discount to the 26x sported by Crown Resorts.

Focus on Controlling Costs

As is the case with other Asia-Pacific gaming markets, this year is expected to be a slog toward recovery for Australia’s operators, with analysts forecasting some type of rebound later in the year. On that basis, gaming companies in the Land Down Under are looking to control costs, with eyes toward a more earnest return to normal in 2022.

JPMorgan says Star will remain committed to cost controls and reining in capital spending this year, as revenue for the 2021 fiscal year at Australia’s casinos is likely to reach just 75 percent of pre-pandemic levels. Updates on cost initiatives could arrive on Feb. 18, when both Crown Resorts and Star deliver results for the first half of fiscal 2021.

“We model total table revenues of $191.5 million in first half 21,” wrote the JPMorgan analysts. “While this is a 37.8 percent decline vs. the pcp, we are modeling a 31.6 percent increase sequentially vs. second half 2020.”