The basic requirement is to undertake a general financial analysis, comparing financial position and performance over the two most recent financial years, of an ASX listed company. Your Learning Facilitator will provide the details of the ASX listed company.
The annual report for the chosen company should be available on the company website and/or will be provided by your Learning Facilitator.
.The analysis should consider each of the following financial ratios:
- profitability and market performance
- efficiency,
- liquidity,
- capital structure
This assignment will contain two elements:
1. Schedule(s) of relevant ratios and other useful calculations
- The detailed calculation of relevant ratios and other useful calculations should be included, as one appendix, prepared using Excel. An example template is provided under the assessment 2 information, FIN600 Assessment 2 Appendix template.xls.
- You will be advised by your facilitator as to which ratios to calculate.
- You are advised to show the formulae used in determining particular ratios and other figures.
2. A written report
The written report is the main element of this assessment. A sample template is provided under the assessment 2 information, FIN600 Assessment 2 report template.doc.
The written report should:
- Explain what is revealed by the ratios and other calculations, in the context of the company’s profitability, asset efficiency, liquidity, capital structure, and market performance.
- In particular, any important changes over the two financial years should be identified, discussed and, where possible, explained.
- Provide an overall assessment of whether the company, over the recent financial year, has been better than the previous financial year, in the perspective of existing equity investors (shareholders).
In preparing this report, students should:
- analyse the financial statements of the business;
- identify key ratios and apply ratio analysis;
- argue the case of why the organisation may or may not succeed in the future and what the business should be doing to help it succeed;
- consider the impact of the political and competitive environment on the business;
- include external factors that need to be taken into consideration and the likelihood of a merger or acquisition;
- provide a recommendation, that is, would you invest in this company after your own analysis or under what circumstances would you buy/save the business?
The Star Entertainment Group Ltd previously known as the Echo Entertainment Group Ltd provides leisure as well as entertainment services. The main services of the company cater to entertainment, gambling, and hospitality. It provides other different services such as sp and sauna followed by other services like salons, fitness centers, and meeting halls. The casino games comprise star poker, blackjack, the stadium, and others (Star entertainment group 2022). The company was established in the year 2011 with its headquarters in Australia. It can serve customers with its strong base of more than 8000 employees.
(https://www.starentertainmentgroup.com.au/about/)
The Group is further committed to optimizing the properties thereby supporting the communities where it operates. It thereby capitalizes on the opportunities that are given by the top-class locations in Sydney, Gold Coast, and Brisbane. Further, it has multi-billion-dollar transformational projects so that it becomes the integrated resort company in Australia.
The company offers the services under the brands The Star Sydney, The Star Gold coast, and the treasury Brisbane. Further, it acquired the Sheraton Grand Mirage located on the Gold coast and thereby looks after the Gold coast and the exhibition center on behalf of the Government of Queensland
• The star Sydney
It is a local landmark that is of more than 20 years and is a vital part of the Pyrmont and Darling Harbor community. It is the home to all luxury hotels. The Darling is the exclusive hotel that is awarded a 5-star rating and featured in the $100 million Star Event center. It played host to different domestic as well as international acts since 2013 like the ARIA awards, AACTA, and other musical talents. The dining portfolio of Star Sydney reflects some of Australia's magnificent restaurants that include the Japanese Sokyo.
(SEG Results Presentation 2022, p 14).
• Treasury Brisbane
It celebrated the premier entertainment destination in 2020 in River city. The reason it is famous is because of the friendly ambiance and the stunning weather. The curving of the river followed by the curling landscape provides a unique experience. Brisbane in short demonstrates the glorious past of the Queensland capitals within the iconic buildings
(SEG Results Presentation 2022, p 12)
• The start of gold coast
It started in 2014 and the extraordinary transformation of the property boasts an $850 million investment. Guests relish their stay at the five star hotel rooms and are served a grand display of dinning and bar experiences. It opened the luxury hotel tower that contains more than 1400 rooms with all the lavish treats (SEG Results Presentation 2022, p 15)
Financial highlights/events of 2022
• In the fourth quarter of 2022 the domestic revenue was higher than the pre-COVID 19 levels
• Higher revenue was due to higher slots and non gaming revenue
• Performance was affected by the Star’s suspension, rebate program and the remediation plan
• The normalized EBIDTA was down by 45.3% (Star entertainment group 2022)
• The statutory EBIDTA was down by 44.3% to $238 million
• The normalized net loss after tax with the significant items was down by $33.4 m
• FY2022 was the third consecutive year whereby the operations was impacted by the COVID-19
• The domestic revenue was down by 1.2% to $1.52 billion
• The operating expenses was reduced by 23.3% to $911 million
• Star with its partners continued the establishment of the key project in the South East Queensland
• The properties were above the pre COVID levels that is gold coast up by 48%, Brisbane enhanced by 13%
• The debt of the company stood at $1.15 billion in 2022 (Star entertainment group 2022)
• the undrawn liquidity as on year ending 2022 stood at $513 million
(SEG Results Presentation 2022, p 7, 10, 11, 43), (SEG ASX release 2022, p2)
Other Highlights
• Systematic approach to the identification of psychosocial hazards in the workplace
• identification and evaluation of the existing control for the minimization of the psychological injury
• Investment of more than $3.5 million for installing the facial recognition technology
• Integration of new CCTV system named Avigilon’ for group wide solution
• Specialized program of leadership called Supernova to aid the skill development of the leaders for the future course of time
• Contribution to the talent management program through the Talent Capability for the optimization of the practices
• Introduction of enhanced investigations that will help in sweeping change
Economic Outlook
• The online gambling market expected to surge at a CAGR of 10.11%
• Online gambling is being influenced by the betting across different region
• Online gambling comprises of wide range of regulatory framework
• Rise of online gambling can be attributed to Virtual Reality (VR) followed by the introduction of blockchain tools
• Introduction of bitcoin gambling has influenced the online gambling market of Australia
• Online gambling market has increased from 73.42 billion in 2021 to $81.08 billion in 2021
• The increment in the online market has happened at a CAGR of 10.4%
• The Russian-Ukraine war led to disruptions impacting the markets
Competitors
• Tabcorp Holdings Limited one of the major rival of Star entertainment group provides gambling and entertainment services
• It operates through Wagering and media and Gaming services
• It offers various services such as agencies, hotels, clubs, internet and mobile devices
• In 2022 the company reported AUD 2,373.3 million in comparison to $2,479.9 million in 2021
• The net income was higher in 2022 which was AUD 6,775.9 million in comparison to AUD 269.4 million in 2021
• The basic EPS stood at AUD 3.046 in 2022 in contrast to AUD 0.123 in 2021
• The share price is down by 81% as compared to 2021and the return to shareholders is 54%
• Tabcorp Holdings failed to grow in 2022 and witnessed a massive drop in the sales. The revenue fell by 3.9%
• Hence, going by the numbers it can be interpreted that the performance of Star Entertainment was better as compared to Tabcorp Holdings (Tabcorp Holdings Results Presentation 2022, p 12,13,14).
The closure of property, restrictions and closure of domestic border led to the major impact on the earnings. Domestic revenue in quarter 4 of 2022 was more than the pre COVID levels which was highlighted by growth in the slots and revenue from non-gaming (Blaschke 2022)
The decline in the finance cost by 7.6% was due to lower average debt balance and the cancellation of the club facility that amounted to $200 million
(SEG Results Presentation 2022, p 44m), (SEG ASX release 2022, p2).
3.1 Profitability and Market ratios
|
(see appendix for calculations) |
2022 |
2021 |
Industry average |
|
Return on equity |
-5.75% |
1.64% |
13.90% |
|
Return on assets |
-3.65% |
1.05% |
30.76% |
|
Net profit margin |
-13.26% |
3.75% |
15.07% |
|
Expense ratio |
82.46% |
71.61% |
n/a |
|
Cash flow to sales |
11.54% |
30.06% |
n/a |
|
Dividend payout ratio |
0.00% |
0.00% |
33.18% |
|
Price earnings ratio |
13.2 times |
61 times |
24.91 times |
The ROE, ROA, and NPM are less than the industry average which was entirely due to the disruptions caused by COVID-19. Operating disruptions, property closure, and suspension activities led to a drop in the performance
The NPM calculates the extent of profit or income is generated as a percentage of income (Carlon 2019). The NPM was negative as the operating expenses increased by 14% in comparison to 2021 to $909 million signified enhanced cost due to the strong labour market, pandemic, regulatory issues, higher investment, and compliance function followed by the investment in external consulting (Lynch 2022).
The company further did not pay any dividends in 2021 and 2022. The PE ratio of the company dropped in 2022 which was owing to the plunge in the share price. Overall, the profitability of the company is disturbed by the COVID-19. There were no dividend payment in 2021 and 2022. The PE ratio of the company witnesses a massive drop from 61 times in 2021 to 13 times in 2022 which is a big worry to the investors.
3.2 Efficiency ratios
|
(see appendix for calculations) |
2022 |
2021 |
Industry average |
|
Asset turnover |
0.27times |
8 times |
n/a |
|
Days inventory |
74 days |
89.00 days |
n/a |
|
Days receivables |
5 days |
14.50 days |
n/a |
|
Times inventory turnover |
4.9 times |
4.1 times |
n/a |
|
Times receivables turnover |
73.95 times |
25.1times |
n/a |
Concerning efficiency the company has performed effectively which is highlighted by the day's inventory indicating the company takes a lesser number of days while keeping the inventory in hand. The times inventory did not undergo any change meaning the company is converting the inventory 4 times in a year. The average receivables of the company have bettered in 2022 and hence the company has been able to better its time's inventory followed by the day’s inventory. The overall efficiency has fluctuated and going by the ratios it can be commented that the business will struggle to pay off the creditors.
3.3 Liquidity ratios
|
(see appendix for calculations) |
2022 |
2021 |
Industry average |
|
Current ratio |
0.56:1 |
0.52:1 |
1.23:1 |
|
Quick ratio |
0.51:1 |
0.47:1 |
n/a |
|
Cashflow ratio |
0.49 times |
1.49 times |
n/a |
Both the current and the quick ratio depict a shortage of liquidity because both the current and quick ratio stands below 1. A current and quick ratio below 1 indicates that the business is having less than a $1 of current assets/ quick assets for every $1 of current liabilities (Sherman 2015). This would lead to an issue in the discharge of obligations. The increment in the current assets is offset by the increment in the current liabilities which means the overall status of the business is under pressure.
The increment in the current assets to $201.5 million has been offset by the increment in the current liabilities which is $356.5 and hence the liquidity of the company is in danger. The company needs to repay its obligations and to have more current assets for better liquidity prospects.
3.4 Gearing ratios
|
(see appendix for calculations) |
2022 |
2021 |
Industry average |
|
Debt to equity ratio |
33.50% |
32.41% |
67.75% |
|
Debt ratio |
32.18% |
32.73% |
30.49% |
|
Equity ratio |
59.96% |
67.27% |
n/a |
|
Debt coverage |
8 times |
3 times |
n/a |
|
Interest cover ratio |
-2.6times |
2.3 times |
n/a |
Optimal debt is best for the company as it helps the business to expand and allows opening up for new opportunities. Higher debt is risky because the company is under obligations and higher component of profit goes towards the interest payment (Davydov 2016). The gearing ratio of Star Group has undergone a marginal change. The debt to equity and debt ratio has changed marginally and is below 35% indicating the company has a lower proportion of debt. The net debt of the company declined in 2022 to $1149 m from $1171 million in 2021 (Star entertainment group 2022). This indicates the company repaid the debt and hence a decline is observed. The debt coverage of the company stands at 8.4 times which means the company has sufficient funds to repay the debts. Herein, the ratios project stability and with a strong liquidity position, the business can be highly fruitful.
Has 2022 been better than 2021 for SGR?
Yes, 2021 was better for Star Entertainment Ltd in comparison to 2022 because the ROA, ROE, and NPM all were in the positive zone. The ratios were not near the market average yet the company posted a better number. The share price was higher in 2021 which was $3.69 which dropped in 2022.
The liquidity had marginal changes and the current and quick ratios increased marginally in 2022. However, the cash flow ratio declined to 0.49 times in 2022 in comparison to 1.49 times in 2021. The efficiency of the company too was better in 2021 whereby the asset turnover, day’s inventory, and times receivable stood at 0.27 times, 74 days, and 4.91 times respectively. The gearing ratio is within the desirable limit which means the company uses low debt for its operation. The decline in the debt level is due to the repayment of debt. Hence, on an overall basis, it can be commented that 2021 was better for Star Entertainment Ltd in terms of performance
Star Entertainment will succeed in the future because the fundamentals of the company have been strong and have been able to absorb the COVID-19 shock. As per J.P Morgan’s statement the company is in tune with the sales line and ahead of the EBIDTA by 5% and 11% percent (Blaschke 2022). The ratios and financials project that the company is working to recover the losses in earnings that were materially impacted by COVID-19.
The ratios are below the industry average which is due to the lockdowns and various other restrictions. Despite the threat from COVID-19, the company has bounced back strongly, and hence with the fundamentals, it has it is likely to succeed in the future. The liquidity of the company is a bit worrying for the company as the current and quick ratio is below 1 however given the debt level the company can further enhance the liquidity and perform better. As the COVID-19 situation eases and normalizes, the group can operate at full capacity which will provide a major change in the ROE, ROA, and NPM.
Star was considering an acquisition of the Crown but the concern whether the company had a proper license for the operation of the casino was a major concern and hence
If the overall financials is observed followed by the ratios it can be commented that at the present juncture Star can merge with another Casino company and make a better prospect. Post COVID-19 the company is facing an acute problem and hence a merger with another company of the same like will provide a major boost to the operations (The Guardian 2022). The debt component of the company is below 50% which is reasonable and the sales are decent considering the overall prospect was hit by Covid-19. The PE ratio is high standing at 61.
Star Entertainment has to undergo the diverse regulations present in the market. Various regulations have changed in Australia as well as other emerging economies and need to be abided by. The changes have been witnessed not only in terms of market entry but also in how the companies operate in the local market. Instead of this, the value of goodwill of Star was slashed by $162.5 million due to regulatory and other problems (McGuire 2022).
Furthermore, gamblers are attracted to the online format of the game for different reasons. Internet gambling comprises a good portion of the live games for dealers. The present age technology is needed for the operation that enhances the enjoyment of the player on various devices. In this segment, the casino industry depends on such alternatives thereby the result is linked to the advancement of the technology (Blaschke 2022)
SGR needs to improve its profitability followed by the liquidity that will enable the company to succeed in the future. For the improvement in profitability, the company must pay attention to the revenue. The company should ensure that the current ratio and quick ratio stands above 1.
With lower debt, the company should aim for strong liquidity that will open up various prospects for the company. Further, the company should strive to attain a lower debt coverage which would imply that the companies have a lower risk.
No, at the current juncture I will not invest in SGR due to variety of reasons.
• The profitability of the company is declining. ROA, ROE and NPM is negative
• The liquidity of the company is weak projected by a weak current and quick ratio less than 1
• The time receivables turnover is higher that is 73 days indicating receivables take more number of days for conversion into cash.
• The debt coverage is high
The fundamental of the company is strong but considering the post COVID-19 era, I will keep this stock into my radar and wait for it to bounce back.
Blaschke, B 2022, Star Entertainment Group sees domestic revenue exceed pre-COVID levels in June quarter, viewed 17 November 2022 https://www.asgam.com/index.php/2022/08/22/star-entertainment-group-sees-domestic-revenue-exceed-pre-covid-levels-in-june-quarter/
Carlon, S., 2019, Financial accounting: reporting, analysis and decision making. 6th ed. Milton, QLD John Wiley and Sons Australia, Ltd
Davydov, D 2016, Debt structure and corporate performance in emerging markets. Research in International Business and Finance, vol. 38,pp. 299-311.
Farley, M 2022, Star Entertainment share price slides on $32 million loss, viewed 17 November 2022 https://www.fool.com.au/2022/08/22/star-entertainment-share-price-slides-on-32-million-loss/
Lynch, P 2022, The Star Entertainment Group FY2022 revenue down 2%, viewed 17 November 2022 https://www.gamblinginsider.com/news/17763/the-star-entertainment-group-fy2022-revenue-down-2
McGuire, A 2022, The Star falls to $199m loss as inquiry, operating restrictions bite, viewed 17 November 2022 https://www.smh.com.au/business/companies/the-star-falls-to-199m-loss-as-operating-restrictions-bite-20220822-p5bbn6.html#:~:text=Star%20reported%20a%20statutory%20loss,the%20COVID%2D19%20pandemic%20restrictions.
Sherman, E 2015, A manager's guide to financial analysis : Powerful tools for analyzing the numbers and making the best decisions for your business, Ama Self-Study
SEG ASX release 2022, ASX release, viewed 17 November 2022 https://www2.asx.com.au/markets/company/seg
Star entertainment group 2022, Star entertainment group annual report 2022, https://www.starentertainmentgroup.com.au/wp-content/uploads/2022/10/2022-Annual-Report.pdf
Tabcorp 2022, Tabcorp 2022 annual report & accounts, viewed 17 November 2022 https://tabcorp-au.cdn.prismic.io/tabcorp-au/c29c9fbb-4158-4356-bf83-2bea512b5610_Tabcorp+AR+2022+Online.pdf
The Star 2022, About the company, viewed 17 November 2022 https://www.starentertainmentgroup.com.au/about/
The Guardian 2022, Star Entertainment says $198.6m loss largely due to Covid closures at casinos, viewed 17 November 2022 https://www.theguardian.com/australia-news/2022/aug/22/star-entertainment-group-casino-operator-loss-covid-closures
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