Star Entertainment Group has responded to the Bell Report with a practical account for its own remediation. The NSW regulator is yet to decide SGR’s license fate, but we expect an elongated period of intense scrutiny together with some significant fines and penalties in lieu of a license revocation.
SGR has already begun its long road to redemption with a very long list of specific actions declared to improve its operational and compliance failings exposed by the Bell Report. We expect SGR’s compliance and operational costs to increase meaningfully on a permanent basis, but the quantum is uncertain at this point. Whether this is sufficient to placate an angry and embarrassed regulator is unknown, but as with Crown Resorts’ Victorian license process, the greater good of the public interest (staff, suppliers, state government tax coffers etc) may save SGR’s bacon.
Under new management. With the resignation this week of acting CEO Geoff Hogg, most of the management and Board that were associated with the period under review have now left the company. New CEO Robbie Cooke does not yet have a confirmed start date, so Ben Heap has temporarily become Executive Chairman. There will be many other new faces driving SGR’s new culture which initially will be overseen by SGR’s appointment of Allen & Overy as an Independent Monitor. Allen & Overy’s job is to provide independent assurance to the Board and Regulator on the progress of SGR’s remediation plan. We do not know if the Regulator will accept this as sufficient oversight but perhaps SGR has anticipated such an appointment given the same treatment was applied to Crown Resorts in Melbourne.
New roles. SGR has already employed new security staff and personal identification technology to assist in preventing excluded persons from entering the casino. On a much broader scale, SGR is expecting to employ more project managers, change managers, subject matter experts and other staff (53 already aboard) to facilitate the grass roots changes.
More technology. Significant technology upgrades are also in the plan ranging from systems relating to Financial Crime and Safer Gambling functions as well as the transition to compulsory carded play and cashless gaming. We expected the latter to happen over time regardless of SGR’s current predicament.
More expenses. We expect much of this activity will show up in SGR’s expense lines and could impact on earnings margins. The full impact may take two years or more to understand.
Whales beached. SGR has already suspended all rebate play, closed international offices and bank accounts, and ceased international junkets and China Union Pay in connection with gambling. At its peak in FY18, SGR’s VIP turnover was $61 billion which generated $826 million of revenue or 30.6% of group revenue in that year.
Investment view
The Star is volunteering to turn itself into a monastery compared to the den of iniquity that Mr Bell exposed. The self-flagellation will go some way to appeasing the regulator, but SGR will likely have to absorb some significant fiscal punishment. Including a potential AUSTRAC fine, we anticipate total financial penalties could amount to over $500 million.
Countering that impost is the likelihood of several (unrelated) asset sales including approximately $170 million in 1H23 from Treasury Brisbane property sale and leaseback with an additional $78 million to be received in 1H24 from tranche 2. The compulsory acquisition of SGR’s Union Street property in Sydney by the NSW Government for a metro train station will bring in $100 million in 2H23f. A potential sale of SGR’s 50% stake in the Sheraton Grand Mirage Gold Coast hotel could also be transacted in FY23. SGR paid $140 million for the stake in 2017.
The extra 1,000 slot machines that SGR had applied for at The Star in Sydney may yet be approved, but the timing is now likely to slip, possibly into FY26f. Meanwhile, across the harbour, Crown Sydney opened on 8 August 2022 and could ultimately impact The Star’s EBITDA by $30-35 million pa, or around 10% of The Star’s assumed baseline EBITDA in FY23f.
SGR’s hard asset base (freehold land and buildings and leasehold improvements) alone are worth more than $3 billion or about $3.15 per share.
The near term catalysts for SGR include the NICC response (NSW regulator) to the Bell Report and SGR’s Annual General Meeting which should provide a trading update.
Sentiment is understandably negative towards SGR, but it can recover under new leadership. For now, SGR is like having 15 on a Blackjack hand.
Risks To Investment View
The delay in recovery of normal business conditions could suppress the earnings recovery for SGR. The Queensland inquiry is underway and presents a similar risk if the findings result in a loss of license and/or penalties.
Recommendation
We have retained our Hold recommendation.
