HOLD Star Entertainment (SGR)

Star’s casinos have re-opened and regulatory clarification provides extra security. Sydney reopened on July 1 and Queensland casinos on July 3. Sydney has been operating since early June but was restricted to fewer than 900 by-invitation-only guests.

Since the reopening, the Star Sydney, which accounts for nearly two-thirds of the company’s revenue, is allowed a maximum of 5000 patrons. The casino has 1490 poker machines and 140 table games, so the new limit will mean there is space for every seat to be filled.

Nonetheless, we don’t expect it to get back to its pre-Covid level of 30,000 guests a day anytime soon. Management has said that based on historical visitation patterns, “spatial distancing measures and capacity limits are expected to constrain visitation and revenue during peak periods”. With a loss of VIP revenue and foreign visitors, we think it’s reasonable to assume a 20%-plus drop in revenue this year.

On a brighter note, Star and its joint venture partners secured $1.6 billion in project funding for Queen’s Wharf Brisbane, ensuring it can go ahead as planned. It also recently received clarification from the NSW government that if Crown Sydney installs poker machines at any time before The Star’s exclusivity agreement ends in 2041, it would receive financial compensation.

Star trades on a forward price-earnings ratio of around 35 based on consensus estimates for 2020 earnings, but less than half that if we look a couple of years out when border restrictions may have been lifted in time for the new Brisbane casino to open. The stock is up 35% since we upgraded it to a buy in March. With its formidable competitive advantages and long-dated licences, we recommend you HOLD. Graham Witcomb is a senior analyst at Intelligent Investor.