Mounting Regulatory Burdens And Costs Will Impair Casino Prospects

Key Takeaways

• Regulatory scrutiny, reputational damage, and compliance costs continue to erode Star's revenues, margins, and long-term viability in the physical casino industry.
  
• Rising digital competition and persistent operating cost pressures undermine recovery efforts, exacerbate financial risks, and threaten the sustainability of Star's business model.
  
• Strategic focus on cost reductions, enhanced liquidity, regulatory relief, and diversification efforts is aimed at stabilizing revenue, restoring profitability, and strengthening long-term market position.

Catalysts

Operates and manages integrated resorts in Australia.

• Intensifying regulatory scrutiny, including mandatory carded play and cash limits, continues to erode Star Entertainment Group's gaming revenue base, with a 37% drop in gaming revenue in FY25 and no sign of regulatory pressure easing in the medium term, threatening both revenue and net margin recovery even as remediation programs proceed.
  
• The rise of alternative digital entertainment channels, such as online casinos and mobile gaming, is accelerating the long-term decline in visitation and relevance of physical casinos, leading to sustained market share erosion and undermining the viability of Star's integrated resort model, with persistent negative impacts on revenue growth and earnings.
  
• Ongoing reputational damage from prior regulatory breaches and license suspensions has resulted in a material deterioration in performance and a risk that the group fails to fully restore critical casino licenses, constraining future cash flow and driving higher compliance costs that compress margins and earnings quality.
  
• Star Entertainment's vulnerability is compounded by its elevated financial leverage and upcoming debt covenant tests, with ongoing uncertainty around lender support and material exposure to interest rate rises likely to force asset sales, dilute shareholder value and further constrain bottom-line earnings.
  
• Persistently rising operating costs across the casino and integrated resort sector, including wage inflation, energy price escalation and higher AML compliance spend, will inhibit any margin recovery for the group, especially as declining scale prevents Star from leveraging fixed-cost assets, entrenching structurally weaker profit margins.

Star Entertainment Group Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Star Entertainment Group compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Star Entertainment Group's revenue will decrease by 4.8% annually over the next 3 years.
• The bearish analysts are not forecasting that Star Entertainment Group will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate Star Entertainment Group's profit margin will increase from -34.6% to the average AU Hospitality industry of 10.2% in 3 years.
• If Star Entertainment Group's profit margin were to converge on the industry average, you could expect earnings to reach A$119.9 million (and earnings per share of A$0.04) by about September 2028, up from A$-471.5 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 3.0x on those 2028 earnings, up from -0.6x today. This future PE is lower than the current PE for the AU Hospitality industry at 35.2x.
• Analysts expect the number of shares outstanding to decline by 0.27% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 11.53%, as per the Simply Wall St company report.

Star Entertainment Group Future Earnings Per Share Growth

Risks

• Deferral of the planned reduction in Sydney's daily cash limit from $5,000 to $1,000 for an additional two years reduces immediate regulatory pressure on gaming revenue, which may stabilize or improve revenue in the medium term.
  
• Progress on cost reduction initiatives and plans for further cost-outs, combined with expected roll-off of extraordinary remediation expenses over the next 24 months, could lead to improved operational leverage and restoration of positive earnings and margins.
  
• Receipt of a $300 million strategic investment from Bally's and Investment Holdings and successful non-core asset sales have bolstered liquidity, supporting the company's ability to navigate near-term challenges and potentially pursue growth investments that increase future earnings.
  
• If The Star is successful in regaining and retaining key casino licenses following remediation efforts, it could restore visitation, recover lost market share, and drive meaningful revenue and EBITDA improvements over the long run.
  
• Growth in non-gaming revenues from hotel, event, and food and beverage segments, along with greater focus on customer-centric initiatives, may help diversify income streams and reduce overall revenue volatility, improving both revenue predictability and net margins in the future.

Valuation

• The assumed bearish price target for Star Entertainment Group is A$0.09, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Star Entertainment Group's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of A$0.2, and the most bearish reporting a price target of just A$0.09.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be A$1.2 billion, earnings will come to A$119.9 million, and it would be trading on a PE ratio of 3.0x, assuming you use a discount rate of 11.5%.
  
• Given the current share price of A$0.1, the bearish analyst price target of A$0.09 is 16.7% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.