They say Queensland is always sunnier than Sydney. Star...

They say Queensland is always sunnier than Sydney. Star Entertainment’s full-year result may be proof.
The company’s Sydney casino has been bogged down by strict Government restrictions, including a 300 person cap in each gaming area, no co-mingling, limits to table use, as well as masks. To top it off, in June, the property was closed fully when Sydney went into lockdown.

Key Points

Sydney revenue sinks

Queensland profits hit record

Sale of properties

VIP revenue has all but evaporated and domestic revenue is down 30%, with operating profits falling 48% due to significant fixed costs.
If there was a bright spot (and we have to look closely) it was that the NSW Government has agreed to negotiations with Star Sydney regarding its proposal to increase the number of gaming machines permitted on the site. Star Sydney operates 1,500 pokie machines, which is well below the 2,500 or more permitted in Crown Melbourne, Queen’s Wharf, and Crown Perth.
The case for approval is strong, but we expect any additional machines to only be granted progressively, not all at once. 

Queensland blooms

If you’re after sunshine, though, the Gold Coast operations are where it's at. While total revenue was down 28%, it was entirely due to the loss of VIP players – domestic gaming floor revenue was up 26%, and earnings before interest and tax (EBIT) rose 38%. Performance was particularly strong following the reopening of borders in the second half of the year.
STAR 2021 RESULTYear to June20212020Chng
(%)Revenue* ($m)1,5611,973(21)EBIT* ($m)219227(4)Net profit* ($m)116123(5)EPS* (c)12.313.3(8)*Normalised for the theoretical win rate
To top it all off, management said construction has begun on Tower 2, a $400m 63-storey building that will incorporate a 5-star hotel. It is scheduled to open in 2025.
The Brisbane casino also had a stellar run with domestic revenue up 38% and EBIT tripling to $86m, a new record. Gaming revenue rose 3% in the second half of the year, despite being closed for a week.
Unfortunately, management flagged a delay in construction of its $3.6bn Queen’s Wharf Brisbane complex, the company’s biggest project, with the expected opening date being pushed back by around six months to early 2023. Still, this remains Star’s biggest growth opportunity.
With the project reaching its later stages, capital expenditure should shrink dramatically over the next 18 months. This should boost free cash flow from 2021’s $362m and support reinstating the dividend.

Sale and lease

Management used some of this year’s cash flow to reduce debt, with net debt falling from $1.4bn to $1.2bn.
That number might fall further thanks to management’s proposal to sell a number of assets in coming years, including the company’s private jet, car parks, hotels, and retail property. The big-ticket items are the potential sale and leaseback of Star’s Treasury building, which management thinks is worth $250m, and the Star Sydney property, a 50% share of which is earmarked for sale. The plan should improve returns on capital from the meager 5% earned in the last couple of years.
Nonetheless, Star remains highly exposed to Australian tourism movements and Government lockdowns. Volatile earnings are to be expected for this business, which is why we maintain a Medium-High risk rating.
With underlying net profit down 5%, the stock trades on a price-earnings ratio of 29. However, as lockdowns ease and tourism gains momentum, there’s scope for the company to double profits in the next couple of years, and then continue to grow once Queen’s Wharf opens. We're increasing the price guide and recommend you continue to HOLD.
Note: The Intelligent Investor Equity Growth Fund and the Intelligent Investor