Results overview (vs consensus):
Revenue $1,767m vs $1,932m
Normalised EBITDA $317m vs $313m (guidance $280-310m)
Net profit $41m vs $27m
No dividend, net debt $633m
FY23 result. SGR’s full year result was above its emaciated guidance range in a market characterised by weak demand and rising costs, for which SGR dug out part of its planned $100m per annum target.
The cost-out program was mainly aimed at Sydney and corporate roles as it removed about 500 people. SGR will need to allow for about $20m in wage rises in FY24 from EBAs. The previously flagged 50% reduction in the $35-45m pa of remediation costs are not expected to happen until FY26. SGR noted that 60-70% of its cost base is labour.
SGR reported a non-cash impairment due to its changed operating conditions, increased casino duty rates and softness in earnings. The Star Sydney, The Star Gold Coast and Treasury were written down by $2.17bn while regulatory and legal costs added $595m to the total.
Excluding fines, penalties and legal fees, EBITDA cash conversion was weak at 78%. Adding in the financial punishment dropped cash conversion to a miserable 20%.
The sale of the Sheraton Mirage Resort for $192m is largely complete and SGR has attained a sale price of $99m for its Union Street property although this is in dispute.
SGR’s balance sheet is substantially better than last year after $800m of equity was raised at $1.20 per share back in February. Net debt at 30 June 2023 was $596m with gearing at 1.9x. However, the company needs to refinance its debt which will likely be at a more costly average interest rate. No dividend was declared for FY23. FY23 capex was just $126m and well below depreciation and amortisation of $195m. FY24 capex is expected to be $100-120m in addition to JV contributions of $159m.
Outlook. Year-to-date trading has been weak, continuing the soft end to FY23. The cost-out program is expected to provide some earnings relief in FY24, but this is now running against revenue that is already down 20% in the period 1 July to 22 August. This latest dip is due to regulatory impacts including customer exclusions and Crown Sydney impacts. In Sydney, revenue is down 23% year-on-year, Gold Coast -17% and Brisbane -14% yoy.
Much delayed, SGR is looking forward to progressively opening its marquee Queens Wharf development in Brisbane from April 2024. On the Gold Coast, Tower 2 is under construction.
A new organisational structure will see three CEOS appointed to the properties. The senior management team has been almost completely overhauled with new emphasis placed on the regulatory and compliance aspects of the business – its key failing in recent years. The risk and compliance team now has 83 people while the AML (anti-money laundering) team has 99 full time employees. A further 55 people are charged with ‘safer gambling capabilities’ duties. A whole new set of values and ethics will be overseen by an entirely new Board of Directors. Class Actions and ASIC investigations against former Directors are also hanging about.
The AUSTRAC penalty remains outstanding. SGR has previously allowed $150m for this as the process meanders on into November for the Statement of Agreed Facts to be finalised. The penalty could be higher than this amount.
SGR is looking to resume VIP/Rebate play given inbound tourism is returning. That sits at odds with the decision by Crown Resorts to close a VIP gaming floor at its Barangaroo property in Sydney due to ‘macroeconomic challenges’.
To summarise SGR’s current licence situation, the Sydney licence is suspended (Manager holding the licence), the Gold Coast and Treasury Brisbane licences are suspended until 1 December 2023 (Special Manager appointed). The Queens Wharf licence is for 99 years from opening.
Investment View
SGR’s big agenda is remediation. The company is not out of the regulatory bad books yet and may never regain its exalted status as a reputable corporate citizen. But that won’t matter so much if the business can regain some earnings momentum from a very low point in its history.
The other near term important factors are the debt refinancing and the AUSTRAC penalty process. Resolution of these issues will clear the last of the major hindrances other than the restoration of the licences.
SGR is about to reintroduce complimentary drinks to customers in its private gaming rooms which is an important drawcard. The company will want to find other marketing and promotional means to encourage visitation and spending. SGR has a large Loyalty program to lean on for this tactic.
This stock is a prime candidate for contrarian investors who may calculate that most of the risks are more than priced in now. More generally, trading may continue to be soft through FY24 before a return to more normal earnings cadence in FY25/26. The earnings recovery will be largely devoid of VIP/Rebate gaming with the era of junket operators now passed.
We continue to see the value sitting in the properties that is being ignored in the share price which has been overwhelmed by the regulatory fallout of the past few years.
Even so, we would prefer to see some normality return to the company’s earnings before pinning a more positive recommendation on it. The outlook commentary did not provide us with that confidence.
Risks to Investment View
Regulatory risks remain the primary issue for SGR. If the regulators decide to rescind its licences, SGR would be unable to continue its gaming business. If customers decide to spend their discretionary money on other forms of entertainment, the earnings recovery could be protracted.
Recommendation
We have retained our Hold recommendation.
