Ann: NSW Casino Duty Rates Update, page-67

NSW CASINO DUTY CHANGES

Need To Know

NSW casino duty rates ettled with a minor increase. Awaiting AUSTRAC fine
Queensland gaming revenue at record levels
SGR could be a target for private equity, in our view

Investment Implications

Star Entertainment has been given a reprieve of sorts as the NSW Government relents on large gaming duty increases.

The previous NSW government had proposed increased duty rates on gambling that would have lifted the top rate of tax on gaming machine revenue to 60.7%. The changes would have grabbed an estimated $364m over three years purportedly to assist disaster-stricken areas in NSW. SGR CEO Robbie Cooke said the changes would be “paralysing” for the group and would require the business to reduce costs by $100m from a base of just $450m in Sydney.

In April, SGR outlined a range of cost cutting measures including a reduction of approximately 500 employees across the group. Together with $40m of previous initiatives, SGR was taking out $100m of annualised costs compared to FY23. Guidance for FY23 EBITDA was placed at $280-310m.

Following the state election, the new Treasurer initially sought to implement the same changes, but SGR has now successfully negotiated a much more sedate outcome which Mr Cooke said would impact FY24 duty payable by about $10m. He also noted the agreement would protect Sydney jobs and the viability of The Star Sydney.

SGR has now sold its Sheraton Grand Mirage Gold Coast property for just over $190m. An agreement to sell the Treasury Casino and hotel buildings has fallen through. This was to have brought in ~$233m of proceeds.

The $800m equity raising in February (at $1.20/share) and dividend suspension has helped the balance sheet, but SGR is still looking to refinance its existing debt funding arrangements.

The earnings guidance does not include provisions for fines or costs associated with implementing the regulatory reviews (legal, compliance). These will be reported as significant items in the FY23 result. The $100m fines imposed by both NSW and Queensland governments are payable by the end of CY23. The unknown AUSTRAC penalty has been provisioned by SGR at $150m, but we note that Crown Resorts received a $450m penalty.

Meanwhile, state-wide gaming machine revenue in Queensland has reached a new all-time record in July at $304m. The trend is well above pre-COVID levels (July 23 was +33% on July 19) emphasising the resilience of the gaming sector to the broader malaise in the economy. Victorian gaming machine trends, which do not affect SGR, are not quite so ebullient with June data down 1.5% year-on-year (excludes casino data).

For SGR, the Queensland casino properties will constitute about 60% of group EBITDA in FY23. Consensus EBITDA is too high given the downgraded guidance provided in April.

Investment View

Could it be that the multi-year horror run of events for SGR is close to an end?

The consequences have been harsh on the share price which recently dragged the market capitalisation below that of Sky City Entertainment. SGR’s market cap has bounced a little on the relatively good news on the NSW casino duty rates but remains substantially below the company’s net asset value at around $3.30 per share.

In a glass-half-full approach, SGR has plenty to be optimistic about. The balance sheet is largely restored to health. The $3.6bn Queens Wharf development in Brisbane is due to open in April 2024 after several delays in the construction process. The pandemic is over and although consumer spending is soft, gaming expenditure is exhibiting resilience. The regulatory road is leading towards cashless gaming but again, SGR is already ahead of the wave with about 70% of play already carded at its properties (and linked to the Loyalty program). The refreshed Board and senior management understand the requirements to regain not only the suitability to hold a casino licence, but also the social licence it had squandered.

At the current price, SGR must look like a bargain for private equity, and it remains a possibility that Blackstone (owner of Crown Resorts) could harbour designs on the business. We also note that Bruce Mathieson now owns 9.9% of SGR and Perpetual recently boosted its stake to 6.9%.

SGR is not out of the woods yet, hence we retain our Hold recommendation.