Things get worse

GUIDANCE DOWNGRADE

Need To Know

• Underlying FY23 EBITDA guidance lowered to $280-310m
• New guidance includes $100m of cost out initiatives
• Guidance does not include provision for fines
• SGR still negotiating over potential increase in casino duty rates in NSW

The operating environment for SGR is deteriorating as consumer spending slows. The contagion has spread from Sydney to the Gold Coast which had previously been doing well. The regulatory scrutiny on SGR remains intense and unrelenting.

Guidance downgrade. The operating environment at The Star Sydney and now The Star Gold Coast has deteriorated due to weak consumer spending behaviour. SGR describes the earnings performance as “at unprecedented low levels (excluding the COVID-19 period)”. 

Including a range of cost initiatives that will extract ~$100m pa, SGR is now expecting FY23 underlying EBITDA to be $280-310m. The previous guidance range of $330-360m was given at the 1H23 result in February.

For context, in the five years prior to COVID-19, SGR EBITDA averaged $543m.

The cost initiatives include reducing headcount by 500 across the Group (excluding risk management and remediation resources), cancelling short term incentives and a salary freeze for non-EBA employees. This will increase the current cost initiative savings from $40m to about $100m pa on-going.

NSW casino duty rates. Prior to the NSW state election, the government said it would increase the gaming tax rates at The Star Sydney. SGR said the increase would have a $100m pa impact. SGR is continuing to discuss the matter with not only the NSW Government, but also the Queensland Government in relation to the tax rates and potential fines and the timing of any such payments. The $100m fines imposed by both the NSW and QLD governments are payable by the end of CY23. The unknown AUSTRAC penalty has been provisioned by SGR at $150m.

Investment View

SGR remains mired in the regulatory fallout of the various state reviews, licence suspensions and fines. The return to suitability to hold a casino licence in NSW and Queensland is a long, arduous and expensive trek. This was all self-inflicted of course, but the earnings recovery is now coinciding with a slump in visitation and gambling spend. The only thing SGR can do is keep cutting operating expenditure and the cuts are going deep. 

The recent $800m equity raising and dividend suspension has helped the balance sheet, but SGR is now investigating other measures to relieve liquidity pressure and increase covenant headroom given the weak operating performance. The Sheraton Grand Mirage Resort Gold Coast is getting closer to a sale and other assets in the Group may also be sold in due course.

In our view, the capital raising has given SGR enough financial stability, but the operating environment is as hostile as it has been for a long time, compounded by the regulatory pressure. We are no closer to seeing a reprieve or a catalyst to change our Hold recommendation.