Star Entertainment: Amid Uncertainty, Shares Are Materially Undervalued

Shares in no-moat Star Entertainment are materially undervalued versus our unchanged AUD 1.20 fair value estimate. Granted, there are headwinds. Remediation costs weigh on profitability, and VIP gaming is suspended. We expect the suspension to persist through fiscal 2024 as Star focuses on proving it is suitable to hold its casino licenses, recovering to about 60% of pre-COVID-19 levels by midcycle. With no more geographic exclusivity, competition is also proving intense, with Crown Sydney gaining from The Star Sydney’s disruption. Crown has won market share since opening its gaming floor in early fiscal 2023. But we think investors are too focused on the troubled near term, overlooking Star’s earnings potential as conditions normalize. We expect earnings to recover from fiscal 2025 as operational restrictions ease, VIP players begin to return, and main-floor table gaming further recovers.