NSW’s newly minted casino regulator has gone as far as it dared by suspending Star Entertainment’s NSW casino licence and placing the casino under the supervision of a special manager for at least 90 days, but probably much longer. SGR’s freshly appointed CEO Robbie Cooke commenced his role this week and will focus relentlessly on enacting the group’s long list of remedies to satisfy the NICC Chairman of its worthiness to regain the licence.
Sentence. The NSW Independent Casino Commission (NICC) has suspended SGR’s NSW casino licence effective from 9am Friday 21 October 2022. A special manager, Mr Nicholas Weeks, will hold the licence for at least 90 days, probably much longer according to NICC Chairman, Phillip Crawford. SGR will also pay a $100 million fine, within our expectations and arguably the minimum that was expected.
Parole. SGR’s chairman, Ben Heaps, provided the NICC with a road map to rehabilitate the casino’s operations and processes. Fortunately, the NICC chairman has considered this to be adequate contrition on the part of the company. Achieving the full list of changes will take Mr Cooke and his team possibly up to two years, but SGR will get to retain the earnings throughout.
AUSTRAC penalty. SGR is not out of the woods yet with the AUSTRAC investigation still to be concluded. We anticipate a significant financial penalty but no other impost.
Queensland decision. The Queensland regulator and Attorney General will deliver their own verdict following the Gotterson review findings. The prognosis here could be similar (a big fine and a special manager appointed) but this may take around 6 weeks to decide.
Investment View
The NICC chairman clearly wanted to punish SGR much more harshly than what was handed down. The SGR chairman’s letter of contrition and repentance, together with consideration for more than 8,000 SGR employees, kept him from doing so. This outcome is broadly similar to Crown Resort’s experience in Victoria. It might therefore be reasonable to expect the same in Queensland. Other than the AUSTRAC outcome, SGR’s regulatory evisceration is now complete, but unlike William Wallace, SGR will live to fight another day.
Mr Cooke will be under no illusions about the task ahead. With a special manager looking over his shoulder at every decision and at every daily report, there will be no room for missteps and probably not much room for front foot business innovation. The grim rehabilitation task may include the implementation of cashless gaming and a whole raft of necessary compliance and process re-engineering. What fun.
From an investor’s point of view, however, the risk-reward calculation now seems much more skewed in favour of owning the stock. The regulatory risk has been largely mitigated, even if it remains a constant warning light and yet the earnings equation is looking much brighter.
Now shorn of the perilous junket play, safely beyond the ravages of government pandemic restrictions and with domestic travel solidly improving, domestic gaming activity can begin to resurrect SGR’s earnings potential.
September data from Queensland shows another strong month of gaming revenue. State-wide gaming machine gross revenue (Clubs and Hotels, excl Casinos) was up 16.5% yoy and up 35% compared to September 2019 (pre COVID). This was the fifth highest month on record with July 2022 the peak. More specifically for SGR, Gold Coast gaming revenue increased 17% yoy and 31% compared to September 2019. Brisbane revenue increased 21% yoy and 35% on September 2019. The implications are good for SGR’s 1H23 result.
Supporting our Hold recommendation is the underlying hard asset backing of the group at more than $3 billion or about $3.15 per share.
Risks To Investment View
The delay in recovery of normal business conditions could suppress the earnings recovery for SGR. The Queensland inquiry is now complete and presents a risk if the findings result in a loss of license and/or penalties.
Recommendation
We have retained our Hold recommendation.
