Physical Casino Decline And Regulatory Tightening Will Undermine Future Outlook

Key Takeaways

• Declining demand for physical venues, regulatory burdens, and social shifts are eroding Star's core business and limiting future growth potential.
  
• Liquidity strain, high leverage, and unresolved compliance issues threaten operational stability, sustainable earnings, and pose ongoing risks to shareholder value.
  
• Strategic investments, operational consolidation, efficiency measures, and regulatory progress position Star for potential earnings recovery and long-term value growth if execution succeeds.

Catalysts

Operates and manages integrated resorts in Australia.

• Structural pressure on visitation and traditional gaming revenue is expected to intensify as digital and online gaming options proliferate, reducing demand for physical casino venues and directly undermining Star's core business, leading to persistent revenue declines.
  
• Increasing regulatory scrutiny, including anti-money laundering requirements and tighter responsible gaming regulations such as mandatory carded play and cash limits, will continue to elevate compliance costs while restricting operational flexibility, ensuring ongoing margin compression.
  
• Shifting social attitudes away from gambling-especially among younger demographics-will shrink the addressable customer base for Star's venues, diminishing long-term revenue growth prospects and limiting the success of future customer reactivation efforts.
  
• The company faces high leverage and a strained balance sheet, worsened by recurring operating losses, asset sales to fund short-term liquidity needs, and significant reliance on external capital injections, all of which threaten future earnings potential and raise the risk of shareholder dilution.
  
• Persistent litigation, unresolved regulatory issues, and reputational damage are poised to delay normalization of operations and risk further license suspensions, directly restricting Star's ability to generate sustainable EBITDA and cash flows for the foreseeable future.

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 8.6% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from -129.9% today to 2.2% in 3 years time.
• The bearish analysts expect earnings to reach A$26.1 million (and earnings per share of A$0.0) by about August 2028, up from A$-2.0 billion 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 13.6x on those 2028 earnings, up from -0.2x today. This future PE is lower than the current PE for the AU Hospitality industry at 33.7x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 11.07%, as per the Simply Wall St company report.

Star Entertainment Group Future Earnings Per Share Growth

Risks

• The successful $300 million strategic investment from Bally's Corporation and Investment Holdings provides Star with immediate liquidity, buying time to execute its turnaround strategy and potentially stabilize or improve earnings and cash flow over the medium term.
  
• Star's consolidation of hotel ownership and future development rights on the Gold Coast, following the exit from DBC, offers the opportunity for enhanced operational control and expanded integrated resort offerings, which can boost long-term revenue and asset values.
  
• If Star can regain lost market share by reactivating customers and improving its customer experience-particularly through focused initiatives in both gaming and non-gaming operations-revenue is likely to recover, directly improving earnings.
  
• Ongoing cost-out programs and operational efficiency measures, including embedding $100 million of annualized savings and the pursuit of further cost reductions, can lead to higher profit margins and improved bottom-line performance in the longer run.
  
• The potential for regulatory stabilization, as management works toward license reinstatement and compliance, may lower risk premiums and facilitate normalized operations, supporting a future recovery in earnings per share.

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$26.1 million, and it would be trading on a PE ratio of 13.6x, assuming you use a discount rate of 11.1%.
  
• Given the current share price of A$0.11, the bearish analyst price target of A$0.09 is 22.2% 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.