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The Star Entertainment Group Ltd (ASX: SGR) share price jumped 7.1% higher on Friday on the back of a solid full-year result.
Investors were bullish on the ASX wagering share to close out the week, but where is the Star Entertainment share price headed in 2020?
What did Star Entertainment report on Friday?
I think investors liked the group’s strong performance between July 2019 and February 2020.
Clearly, the coronavirus pandemic weighed on earnings in the back half of the year. State governments introduced sweeping restrictions which hurt revenues across Star’s casinos in Brisbane, Sydney and the Gold Coast.
Star reported a 22.8% decline in earnings before interest, taxes, depreciation and amortisation (EBITDA) to $430 million. However, there were strong signs for investors looking long-term given the first-half growth.
Despite a 46% drop in net profit, the Star Entertainment share price climbed higher as one of Friday’s top performers.
Tough trading conditions led the wagering group to stand down 90% of staff and focus on capital management in the short-term. No dividend was announced as management focused on maintaining solvency and liquidity in these uncertain times.
Is the Star Entertainment share price a gamble?
I certainly think the Star Entertainment share price is worth a look for $3.15 per share.
The ASX wagering group’s shares are up 23.5% in August but remain down 32.4% for the year. It’s not alone in feeling the COVID-19 pain but could be subject to further uncertainty.
I see a couple of issues facing Star Entertainment in the short-term. The first is the tight restrictions on operations with state governments unlikely to classify Star as an essential service anytime soon.
The broader, medium-term impact I see is the border closures. That’s particularly the case with international borders remaining shut given the significant revenue from international VIPs.
Both of these factors could weigh heavily on the Star Entertainment share price in 2020 and 2021. Earnings growth appears to be largely beholden to Federal and State government restrictions.
That creates some valuation uncertainty as future cash flows are very difficult to forecast. In my view, that makes Star Entertainment a strong buying opportunity or a potential falling knife.
Foolish takeaway
The Star Entertainment share price could be good value if it emerges on the other side of this with its balance sheet intact.
I do think the wagering group is a bit of a gamble given the uncertainty over the next 12-18 months.
However, that’s the case for many ASX shares in the current climate with significant potential upside from a quicker than expected recovery.
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Motley Fool contributor Ken Hall has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.
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