An eloquence of lawyers has enveloped Australia’s casino industry for the better part of two years. That run is set to be extended as the Queensland Government echoes the inquiries conducted in NSW, Victoria and Western Australia into both Star Entertainment and Crown Resorts.
The Queensland Government has appointed a former judge, the Honourable Robert Gotterson AO, to review SGR’s Queensland casino operations. The inquiry begins in July and is expected to be report its findings by the end of September 2022.
In separate news, SGR has appointed Robbie Cooke as its new Managing Director and CEO. Mr Cooke is well known to the Australian corporate scene given his previous roles at UNiTAB and Tatts Group where he ran the lotteries, wagering and gaming operations. He leaves his current role as CEO of Tyro Payments to take on the arduous job of fixing SGR’s regulatory and legal processes, as well as resurrecting the on going operational side of the business.
Investment view
If the playbook is consistent, SGR could see a period of legal evisceration in a Queensland courtroom, followed by a severe admonishment, loss of licence and the appointment of an overseer until its legal obligations and processes are properly overhauled.
The Bell Review has almost completed in NSW, and it appears inevitable that SGR will be found to be unsuitable to hold its Sydney casino licence. A similar outcome can be expected for the Queensland inquiry.
The remediation process at SGR is already well underway with a major cleanout of Board and senior management positions. The ultimate goal of rehabilitation will be the reinstatement of the licence. Concurrently, SGR is facing substantial financial penalties that include NSW/QLD regulatory fines, an AUSTRAC fine and a shareholder class action settlement.
As we thought would happen, the NSW Government has advised SGR that it is not appropriate at this time to move forward on its proposal to increase the number of gaming machines at The Star Sydney. We estimate the EBITDA from an additional 1,000 EGMs to be $65-70 million for SGR’s earnings when it happens.
This coincides with the news that Crown Sydney has gained approval to commence gaming operations at Barangaroo under an initial conditional period to 31 December 2022. An opening date is yet to be set. We think Crown Sydney will have ~10% impact on SGR’s EBITDA from a ~33% impact on SGR’s private gaming room revenue.
SGR’s gearing remains higher than consensus forecasts imply, in our view. We think the company will not pay a dividend in FY23-24f as a consequence. This is in contrast to consensus forecasts for the dividend to be reinstated in FY23f.
The domestic gaming market is tentatively recovering but will be sensitive to consumer spending levels as interest rates rise. VIP gaming is all but absent for now (no junkets) and SGR’s cost base will be under pressure from inflation and much higher compliance costs. Consensus earnings forecasts are too optimistic in our view, and we have a more cautious stance on the earnings recovery.
The underlying asset value of SGR is undeniably solid. It has high quality, long term, quasi monopolistic assets which are highly cash generative. The extensive capex program at Queens Wharf Brisbane (QWB) is making good progress and will fundamentally change the attraction of the precinct.
SGR’s 33% JV stake with partners Chow Tai Fook and Far East Consortium has flagged the development of five additional hotel/residential towers on the Gold Coast. The assets have a book value over $3 billion or approximately $3.15 per share compared to the current share price at $2.80. If SGR decided to pursue an OpCo/PropCo model for the group, we think this could potentially add $2-3 per share to the share price over time.
The near term sentiment on the stock will understandably remain cautious while the Queensland regulatory process takes its turn to put SGR through the mincer.
Risks to investment view
The NSW regulator could take SGR’s casino license away on the grounds it is unsuitable to hold the license. The delay in recovery of normal business conditions could suppress the earnings recovery for SGR.
Recommendation
We retain our Hold recommendation on SGR.
