Star Entertainment Group remains in the naughty corner until the regulatory inquiries are complete and the consequences known. SGR has wisely not wasted any time to instigate its own rehabilitation ideas. Recent unrestricted trading shows the business is quickly getting back to its best as an entertainment magnet, but hopefully one without the baggage of the past.
The Bell (NSW) and Gotterson (Qld) regulatory reviews are expected to complete by 31 August and 30 September respectively. The Bell Review, as the NSW ILGA inquiry is known, has been as scathing as the reviews imposed on Crown Resorts in NSW, Victoria and WA. ‘Bell’ has already claimed the resignations of the MD/CEO, CFO and most of the Board. The fallout might also mean SGR cannot get the additional 1,000 slot machines it requested although the rationale for granting it is quite advantageous for the state government.
NSW has already passed new legislation which adopted all 19 of the Bergin Inquiry (into CWN) recommendations. A new Independent Casino Commission has been established (ICC) to which casino operators will report annually (via an independent auditor). Casino operators will need to monitor patron accounts much more closely and initiatives around cashless/carded play are likely within two years.
There is not much left for ‘Gotterson’ to pick over that might be different, but as it is focused on the Queensland casinos (Gold Coast and Brisbane), we cannot be certain this is the case. A ‘do nothing’ outcome is highly unlikely from either review, so we anticipate a dossier of changes to be implemented that will increase compliance (and costs). As with Crown Resorts, we do not expect SGR to lose either licence, but a period of special oversight might be imposed.
Separately, the AUSTRAC investigation into The Star (Sydney) is on-going. This too may result in some form of punishment, perhaps a large fine.
SGR has begun its Renewal Program that includes the appointment of the well-respected Robbie Cooke as MD/CEO. He has quickly appointed Scott Wharton as CEO of The Star Sydney and Group Head of Transformation. Wharton will do the dirty work to scrub the place down and win back public confidence. The list is long.
SGR has ceased all work with junket operators, closed its offshore offices and stopped the use of high risk overseas payment channels including the use of China Union Pay. It has suspended all international and domestic rebate play – no more whales.
Operationally, SGR is improving quickly as the restrictions from COVID-19 dissipate. In Sydney, June quarter domestic revenue was back to pre-COVID levels from 2019. It is too early to say if the Crown Sydney casino is having any impact, according to SGR, but we maintain our view that SGR will see an EBITDA impact of $30-35 million, or approximately 10% of The Star’s earnings.
The Gold Coast has burst back into life with June quarter domestic revenue up 48% on pre-COVID levels. The Dorsett Gold Coast Hotel and The Star Residences both opened during the period. The hotel is chockers and room rates are peachy. SGR has settled over 90% of the apartment sales. Tower 2 construction is underway with all apartments pre-sold.
Brisbane has also seen a quick improvement in operating performance with restrictions now ended. Domestic revenue in the June quarter was up 13% on pre-COVID levels although costs have risen 15% in 1H22 reflecting the higher activity plus some preparation for the QWB (Queens Wharf Brisbane, SGR 50%) opening in the second half of 2023. The total project cost of QWB is expected to be about 10% higher than the guidance of $2.6 billion. That’s not a bad outcome considering the period in which it was built.
Fortunately, SGR has managed its balance sheet well throughout the restricted trading periods and the heavy capital expenditure on new developments. The latter is now ending so we expect to see a big lift in both operating and free cash flow. Net debt is $1.15 billion as at 30 June 2022 and remains compliant with (amended) covenants. No final dividend was declared. Group capex for FY23f is $150 million, comfortably below depreciation expense of c$200 million.
Investment view
Navigating the outcomes of the regulatory reviews is priority number one, two and three for SGR. Completing the major capital projects and getting them operational comes next followed by some smaller asset sales. SGR is again considering unlocking the value of its property assets (sale and leaseback) but this is not certain. New planning controls in Pyrmont (where The Star resides) has opened the possibility of a 105m six-star hotel, while a new Sydney Metro West Station has been proposed adjacent to the casino.
Persistent labour cost pressures and some inflationary impact of 5-10% pa on some items (insurance, utilities etc) may put a squeeze on margins in the short term. Higher compliance costs are a given.
SGR still has high quality, long term, quasi-monopolistic assets. The value of the hard assets is approximately $2.4 billion of land, building and leasehold improvements plus a further ~$600 million for investments in associates. This is the historic cost, not the market value of these assets. In aggregate, this equates to about $3.15 per share.
Risks to investment view
The NSW regulator could take SGR’s casino license away on the grounds it is unsuitable to hold the license. We see this as unlikely given it would be inconsistent with the approach taken with Crown Sydney. The delay in recovery of normal business conditions could suppress the earnings recovery for SGR. The Queensland inquiry is now underway and presents a similar risk if the findings lead to a loss of licence and/or penalties.
Recommendation
We have retained our Hold recommendation.
FIGURE 1: FY22 RESULT
FIGURE 2: VIP TURNOVER IN AUSTRALIAN CASINOS
