Star Entertainment has quickly moved to repair its balance sheet with the announcement of an $800m capital raising. This will financially restore the company to a solid footing, but the regulatory roasting continues as fines and gaming tax increases loom. Operationally, Queensland is improving nicely while Sydney is in a funk.
Capital raising. The $800m capital raising is in two parts. A $115m Institutional placement and a $685m pro rata entitlement issue. The proceeds will be used to reduce debt. SGR’s net debt will fall to $341m from $1.11bn as a consequence so that leverage falls from 2.7x to 0.8x. CEO Robbie Cooke said it will position the company for the next three years.
An immediate benefit of the capital raising will be covenant relief from SGR’s banks and USPP noteholders through to June 2025. Consequently, SGR will not pay a dividend before it achieves leverage within a 2.0-2.5x range and regains its suitability to hold its casino licences.
SGR will bring in further cash proceeds from the sale and leaseback of the Brisbane Treasury property (~$233m in 1H24) and the sale of the Union Street property in Pyrmont for about $100m as the NSW Government compulsorily acquires it for a metro station. SGR might also be considering selling a stake in its Sheraton Mirage resort on the Gold Coast. In total, SGR could add ~$500m to the kitty from asset sales.
Licences. To recap, SGR’s NSW casino licence is currently suspended with a Manager holding the licence. The Star Gold Coast and Treasury Brisbane licences are suspended until 1 December 2023 with a Special Manager appointed. QWB will replace Treasury Brisbane when it opens in December 2023, so we assume the licence will transfer.
NSW casino tax rates. The most recent kick in the guts for SGR was the intention of the NSW Government to increase the gaming tax rates at The Star Sydney, supposedly to level the playing field with the Pubs and Clubs. But it just smacks of a political pot shot, in the middle of an election campaign, using SGR as a soft target to score points with voters and gorge on some easy revenue at the same time. SGR remains in negotiation with not only the Government but the Opposition and other groups.
SGR said the proposed new casino tax rates would have $100m pa impact. SGR said it employs over 4,000 people at the casino and this is a useful bargaining chip. SGR is indicating that if the tax rate increases proceed, it may have to drastically reduce operating costs which would include redundancies.
Fines. After the Bell and Gotterson reviews in NSW and Queensland respectively, SGR was fined $100m in each state, both fines payable by the end of calendar 2023. Still to be determined is the AUSTRAC penalty for which SGR has made a provision of $150m. Additionally, there are four separate class actions underway in Victoria.
1H23 result. The Queensland properties performed strongly in the period. Gold Coast domestic revenue increased 30% on pre-COVID levels setting a new record. The Star Sydney is struggling under the weight of increased operating restrictions, an increased number of excluded patrons and the competition across the bay at Barangaroo.
QWB. In some good news for investors, SGR said the big Queens Wharf Brisbane development will open on a progressive basis from December 2023. The river front landmark property comprises four hotels with about 1,000 rooms (just what the 203 Brisbane Olympics needs), more than 50 restaurants, bars and cafes, a 1,500 head ballroom, a Sky Deck and loads of public space. The casino will move into the new premises with the old Treasury casino becoming a Ritz-Carlton hotel. QWB began its journey back in 2015 when Echo Entertainment (now SGR) won the tender ahead of Crown Resort, to develop the precinct.
Investment View
In the first 6 weeks of trading in 2H23, domestic revenue at all properties is ahead of pre-COVID levels. SGR said based on that pattern of trading, it expect 2H23 underlying EBITDA to be $330-360m. But there is plenty of uncertainty in the outlook, readily admitted by SGR.
The NSW Government’s attempt to rip up the 20-year tax agreement it signed in May 2020 is a chilling example of how fragile the regulatory environment can be for the gaming industry. That agreement preserved SGR’s position as the exclusive provider of EGMs in the two-casino market. Will this change too? SGR is entitled to compensation if it does change, but it is clear that governments can and do change the rules to suit themselves. The NSW and Queensland governments have watched the gaming tax revenue dwindle in recent years (see Figure 2), so they may be trying to adjust the situation.
SGR’s licence impairment is recognition of the changed regulatory situation and the consequences of the legislation that followed the Bell Review and the prospect of the higher casino tax rates.
Despite all the damage caused by the regulatory reviews (deservedly so) and the pandemic, SGR still has hard assets that are worth somewhere around $3bn. Post the capital raising, SGR will have some financial breathing space. It is spending heavily on rectifying its operational and compliance processes to regain suitability for its licences. Consumers may be feeling the pinch of higher interest rates and inflation, but leisure spending and domestic tourism are still a positive for SGR’s business.
It is fairly simple to see where the share price will trade in the next week or two, but there is scope for a big recovery given time. Perhaps this is why an investor like Bruce Mathieson is rumoured to be accumulating a stake in SGR. Chow Tai Fook and the Far East Consortium – SGR’s partners in QWB – have each committed to their allocation in the capital raising.
SGR has probably entered into ‘deep value’ territory which may scare some investors, but the upside could be very rewarding.
Risks to Investment View
The delay in recovery of normal business conditions could suppress the earnings recovery for SGR. Regulatory uncertainty is now at maximum in the gaming industry. The capital raising might not be successful leaving SGR financially vulnerable.
Recommendation
We have retained our Hold recommendation.
