Company Reports

Looming liquidity concerns delayed no-moat Star Entertainment’s financial results, with the shares suspended from the start of September. But the casino now has breathing room with new debt and associated covenant waivers, buying time to secure a stronger financial position. We cut our fair value estimate 22% to AUD 0.67 per share given weaker earnings forecasts and a likely value-dilutive equity raise.

We expect Star Entertainment to deliver strong earnings growth over the next decade, buoyed by the recovery from pandemic-induced lows, the ramp-up of the Queen's Wharf and Gold Coast growth projects, and solid performance from its Sydney property, despite increased competition. The Star casino in Sydney is the company's core asset and historically generated approximately most of group earnings as the city's only casino. However, Star's exclusivity in Sydney has come to an end with a second Sydney casino license issued to Crown Resorts, opening in August 2022. This is a major blow to Star, ending its long-standing monopoly in Sydney.

The final report from the second Bell inquiry into Star Entertainment’s suitability to hold a casino license in New South Wales was damning. But the outcome was about as good as Star could’ve reasonably hoped. Star remains unsuitable to hold its casino license, but once again, the report stopped short of recommending Star’s license be revoked completely.

We lower our fair value estimate for shares in no-moat Star Entertainment by 4% to AUD 0.86 following a trading update. Main-floor gaming is holding up across all venues, up about 5% in aggregate. But it’s not enough to offset further deterioration in private gaming rooms—particularly in Queensland. Star called out economic conditions in general, and cost-of-living pressures in particular. We expect the strong main floor gaming result reflects an element of “trading down” from private rooms to main floor. Fiscal 2024 revenue overall is shaping up to be about 10% below fiscal 2023 and about one third lower than pre-covid levels.

We expect The Star Entertainment Group to deliver strong earnings growth over the next decade, buoyed by the recovery from pandemic-induced lows, the ramp-up of Queens Wharf and Gold Coast growth projects, and solid performance from its Sydney property, despite increased competition. The Star casino in Sydney is the company's core asset, which has historically generated approximately most of group earnings as the city's only casino. However, The Star's exclusivity in Sydney has come to an end with a second Sydney casino licence issued to Crown Resorts opening in August 2022. This is a major blow to The Star, ending its long-standing monopoly in Sydney.

Already battered and bruised from increased regulatory scrutiny in both New South Wales and Queensland, Star is facing the possibility of having to close its doors in Sydney. A complete refresh of the board and executive team, which was supposed to win back favor with the regulator following the original Bell inquiry into Star’s suitability to hold a casino license, has all but failed. In the wake of the second Bell inquiry, or Bell Two, former CEO Robbie Cooke has stepped down, along with several other executives, including former CFO Christina Katsibouba. New Chair Anne Ward has replaced David Foster, whose remaining time with Star appears limited.

Weakness in premium gaming rooms continues to weigh on Star Entertainment’s earnings. Underlying EBITDA for the third quarter was AUD 38 million, down 12% on the previous corresponding period. While main floor gaming is up about 5% in aggregate, double-digit revenue declines in premium gaming rooms across all properties dragged revenue 5% below the PCP. Compliance costs have also risen as the firm focuses on regaining suitability to operate The Star Sydney in light of the second Bell inquiry, with monthly operating expenses about AUD 2 million higher than in the first half.

We expect The Star Entertainment Group to deliver strong earnings growth over the next decade, buoyed by the recovery from pandemic-induced lows, the ramp-up of Queens Wharf and Gold Coast growth projects, and solid performance from its Sydney property, despite increased competition. The Star casino in Sydney is the company's core asset, which has historically generated approximately 70% of group earnings as the city's only casino. However, The Star's exclusivity in Sydney has come to an end with a second Sydney casino licence issued to Crown Resorts opening in August 2022. This is a major blow to The Star, ending its long-standing monopoly in Sydney.

The second inquiry into Star’s suitability to hold a casino license in New South Wales, Bell Two, is already having punitive results. CEO Robbie Cooke has immediately stepped down, along with several other executives—including CFO Christina Katsibouba. Chairman David Foster will take the mantle as executive chairman while the company again searches for a permanent CEO. Cooke noted that his continuation in the CEO role would not be conducive to the regulator finding Star suitable to hold its Sydney casino license. He will be available as a consultant to Star for six months to aid the transition.

We cut our fair value estimate for no-moat Star Entertainment by 25% to AUD 0.90 per share. The reduction to our valuation is based on several factors. First, we now expect VIP earnings to return from fiscal 2026, pushing it out by about a year, and at a lower base. Second, we expect lower long-term profitability for the company as cost cuts have been less effective than expected at offsetting cost-base inflation. Third, the second Bell inquiry raises concerns that the uptick in compliance costs over the last few years has been insufficient to fix Star’s problems, and we expect permanently higher compliance costs.

We expect The Star Entertainment Group to deliver strong earnings growth over the next decade, buoyed by the recovery from pandemic-induced lows, the ramp-up of Queens Wharf and Gold Coast growth projects, and solid performance from its Sydney property, despite increased competition. The Star casino in Sydney is the company's core asset, which has historically generated approximately 70% of group earnings as the city's only casino. However, The Star's exclusivity in Sydney has come to an end with a second Sydney casino licence issued to Crown Resorts opening in August 2022. This is a major blow to The Star, ending its long-standing monopoly in Sydney.

The second inquiry into Star’s suitability to hold a casino license for The Star Sydney was a surprise. Special manager Nicholas Weeks’ tenure ends on June 30, 2024, but the NSW Independent Casino Commission, or NICC, isn’t confident about handing the license back by then. The regulator said that “Star has not yet satisfied the NICC that it is suitable, or is capable of becoming suitable, to hold a casino license.” The new inquiry, chaired again by Adam Bell, is set to conclude on May 31, 2024, this time behind closed doors—likely a relief for Star, given the reputation damage from the first inquiry.

Shares in no-moat Star Entertainment are materially undervalued versus our unchanged AUD 1.20 fair value estimate. Granted, there are headwinds. Remediation costs weigh on profitability, and VIP gaming is suspended. We expect the suspension to persist through fiscal 2024 as Star focuses on proving it is suitable to hold its casino licenses, recovering to about 60% of pre-COVID-19 levels by midcycle. With no more geographic exclusivity, competition is also proving intense, with Crown Sydney gaining from The Star Sydney’s disruption. Crown has won market share since opening its gaming floor in early fiscal 2023. But we think investors are too focused on the troubled near term, overlooking Star’s earnings potential as conditions normalize. We expect earnings to recover from fiscal 2025 as operational restrictions ease, VIP players begin to return, and main-floor table gaming further recovers.

We lower our fair value estimate for shares in no-moat The Star Entertainment Group by 33% to AUD 1.20 per share, overwhelmingly due to the dilutive impact of an AUD 750 million capital raise. The equity raise comprises an AUD 589 million 1 for 1.65 pro rata nonrenounceable rights offer and an AUD 161 million institutional placement. A further AUD 450 million in new debt facilities will wipe out all of Star's existing debt and provide headroom for any near-term payments—including our estimates for AUD 200 million in state regulator fines and an AUD 330 million penalty from AUSTRAC.

We maintain our AUD 1.80 fair value estimate for no-moat Star Entertainment. Underlying fiscal 2023 EBITDA lifted 34% to AUD 317 million, about 6% above our forecast. Reduced pandemic restrictions allowed significant revenue and earnings growth across all properties. But earnings remain materially below pre-COVID-19 levels as regulatory operating restrictions and exclusions have been exacerbated by weaker consumer spending. We lower our fiscal 2024 EBITDA forecast by about 8% to AUD 341 million, largely due to lingering remediation costs and lower VIP gaming forecasts. But our EBITDA forecasts from fiscal 2026 are largely unchanged, and Star shares screen materially undervalued. We think investors are too focused on near-term headwinds, overlooking Star's earnings potential as conditions normalize.

We lower our fair value estimate for shares in no-moat Star Entertainment by 30% to AUD 1.90 following the release of interim fiscal 2023 earnings and announcement of an equity raising. We reduce our fair value estimate by 26% due to the significantly dilutive impact of the AUD 800 million equity raising alone, which will comprise a AUD 685 million 3-for-5 non-renounceable rights offer and AUD 115 million institutional placement. The additional 4% reduction to our fair value estimate is due to lower profitability forecasts for The Star Sydney.

The Queensland casino regulator has handed down disciplinary action for Star Entertainment following investigations, finding the firm unsuitable to hold a casino licence in the state. As expected, disciplinary action stopped short of canceling its Queensland licences, which contributed about one third of precoronavirus earnings. We had anticipated Star would be given the opportunity to prove suitability and ultimately continue to operate, mirroring the decision made in New South Wales. Star has been ordered to pay penalties of AUD 100 million, its licence is to be suspended for 90 days (on a deferred basis from December 2023), and a special manager will be installed to oversee operations. Nicholas Weeks, the same special manager appointed to oversee Star Sydney, has been appointed special manager for the Queensland casinos. Star will pay the special manager's costs, but will still continue to receive net earnings from casino operations. The disciplinary actions in Queensland, like New South Wales, are largely as expected, and we make no changes to our AUD 3.90 fair value estimate for shares in no-moat Star.

We make no changes to our AUD 3.90 fair value estimate for shares in Star Entertainment following a trading update. Fiscal 2023 year-to-date domestic revenue is 1% higher than the precoronavirus corresponding period, tracking our unchanged forecast for fiscal 2023 domestic revenue to be about 1% higher than fiscal 2019. Star also expects remediation costs of AUD 35 million-AUD 45 million in fiscal 2023 in response to damning investigations by the New South Wales and Queensland regulators. About half of this expense is expected to continue beyond fiscal 2024, supporting our view that much of the elevated risk and compliance spending is likely to be permanent amid heightened regulatory scrutiny.

We maintain our AUD 3.90 fair value estimate for shares in no-moat Star Entertainment following the release of the Bell Report into the firm's suitability to hold a casino licence in New South Wales. The report, released by the New South Wales Independent Casino Commission, or NICC, found The Star unsuitable to hold its Sydney casino licence. This was the outcome we anticipated.

No-moat Star Entertainment has hired a new CEO and managing director, the former Tyro Payments CEO Robbie Cooke. The move represents a return to the gaming industry for Cooke, who prior to Tyro, was at the helm of Tatts Group from 2013 until its 2017 merger with Tabcorp. While Tyro shares are down around 80% since the beginning of 2022, we anticipate the job at Star will be no easier with regulatory reviews looming in New South Wales (and also likely in Queensland).