We have seen this movie before, only the bad guy was Crown Resorts. The sequel features Star Entertainment as the Bell Review continues its prodding and probing at the NSW ILGA inquiry.
The independent inquiry, led by Adam Bell SC, into SGR’s business operations is not going well for the company. The ‘Bell Review’ as it has become known, has delivered some damaging revelations that may lead to the regulator determining whether SGR is a ‘suitable person’ to hold a casino license in NSW or not.
The Bell Review will deliver its final report to the NSW ILGA by 30 June 2022. On what we have heard so far, the possibility of SGR losing its NSW license is real. But as we saw in the original movie, CWN was able to provisionally retain its VIC license by undertaking a broad series of steps and changes across its entire business, including substantial changes to the Management and Board. We see a similar pathway for SGR, and the process has already begun with MD/CEO Matt Bekier’s resignation this week.
We anticipate wholesale changes to the Board as a given, potentially further changes to management and an on-going much increased annual compliance and regulatory cost to the company.
There may be some collateral damage to SGR’s request to the NSW Government for an additional 1,000 slot machines in Sydney. The rationale for the request is soundly based as it draws underutilised slot entitlements away from clubs and into the hands of a more regulated environment at the casino. This would logically produce more tax revenue for the government. In the light of the Bell Review findings so far, it would probably not be in the NSW Government’s interest politically to approve the additional slots until the dust has settled on the inquiry and its outcome. On that basis, we think it will be at least 18 months before the additional slots are approved for SGR, leaving near-term earnings devoid of the likely boost.
SGR is also currently under investigation by AUSTRAC for its AML (anti money laundering) activity. In our view, the company is facing a substantial fine which could be in the order of $200 million. That review may not be completed before the end of 2022 leaving further uncertainty shrouding the share price.
SGR will eventually have to contend with the opening of the Crown Sydney gaming facilities. Our assumption is that The Star Sydney’s private gaming room revenue is impacted by approximately onethird (predominantly the Sovereign and Oasis rooms) as SGR’s premium customers may spend time and money at Crown Sydney. Our current assumption is therefore an EBITDA impact of $30-35 million or about 10% of The Star Sydney’s earnings.
For context, we expect the additional 1,000 EGMs at The Star Sydney to eventually generate $65-70 million of EBITDA annually.
Investment view
In our previous note, we said that SGR was ‘not Crown’ in reference to the latter’s humiliation at the hands of state regulatory inquiries in Victoria and WA. It seems we overestimated SGR’s willingness to ‘do the right thing’ in competing against CWN and unfortunately, it too is now hoist by its own petard.
Confidence in SGR has understandably waned and until the necessary surgery to the Board, Management, culture and systems is completed, for many investors it will remain a high risk prospect.
But as we have consistently explained, SGR’s assets are high quality, long term, quasi-monopolistic and cash generative. 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 $3.20 per share which is very close to the current share price. Should SGR pursue a PropCo/OpCo style strategy in the future, this could add significant value.
SGR is making good progress on its Queens Wharf Brisbane development (SGR 50%) and recently opened the new Dorsett Hotel on the Gold Coast with Tower 2 on schedule to open in FY25f.
SGR’s big capex program is beginning to wind down with FY22f group capex expected to be $125-150 million and about $175 million in FY23f. There is potential for up to five additional residential residential/hotel towers on the Gold Coast as part of SGR’s 33% JV with Chow Tai Fook and Far East Consortium.
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.
Recommendation
We have lowered our recommendation to Hold given the uncertainty surrounding the Bell Review, the AUSTRAC investigation and further anticipated Board and Management changes.
