Reivew of Independent Expert Report by Grant Samuel

I have finished reading the Independent Expert Report by Grant Samuel and thought I would give some key points from my reading of the report along with my view on the company's outlook based on what I read.

The report, from my view of it, paints a really bad picture of the Star from an investment return perspective. I think that if you are buying shares on the market today at the current price of 13 cents, you are making a speculative bet and need many future events to go your way.

Lets look at some points from the report (with my commentary):

1. The Star is getting a bail-out through convertible notes of $200m from Bally's Corporation and $100m from the Mathieson Family. The total bail out being $300m.

2. The bailout will significantly dilute shareholders. Before the bailout, Mathieson held 10.01% and all others held 89.99%. Assuming that Bally's and Mathieson convert all of the $300m convertible notes, the shareholding would be 23.22% Mathieson, 37.77% Bally's, and 39% all others.

3. The convertible notes can be converted at a price of 8 cents. Compare that to the recent price on the market hovering around 11 cents and you will note that Mathieson and Bally's get to convert at a discount of around 30% to gain a combined controlling interest. Normally, one pays a premium to obtain control. Upon converting the notes, In a Board of 5 members, Bally's will get to elect 2 members to the Board and Mathieson will get to elect 1 member to the Board.

4. Grant Samuel valued the shares of the Star between 13c to 31c. However, their valuation was a technical one, in the sense that regulation required them to value the shares on a control basis pre-bailout and disregarding the current financial distress facing The Star.

Why is this important? Lets just say we were to apply a standard 30% discount for lack of control to the Grant Samuel valuation. This would bring their range down to 9c to 22c. Secondly, by disregarding the financial distress that The Star is in, in my view the discount rate (weighted average cost of capital) used by Grant Samuel in their discounted cash flow method of 9.3% to 10.5% is grossly understated.

--> Grant Samuel assumed a cost of debt of 6.6%.

--> The cost of debt assumption they used is already problematic because the current interest rate that the Start pays on their debt facilities is 13.5%, which is a huge 7.5% higher that what Grant Samuel assumed. Essentially, Grant Samuel had to assume a lower cost of debt because the expensive debt that Star currently pays is higher than normal because they are in a distress situation. Grant Samuel is arguing that in normal conditions, 6.6% would be the normal rate.

--> The actual cost of debt that the Start pays is already higher than the WACC assumed by Grant Samuel (13.5% vs 9.3%/10.5%). Now throw in the cost of equity, which you can assume (especially given the situation the Star is in) would be more expensive that the current cost of debt the Star is paying, and you would end up with a total WACC much higher than Grant Samuel's assumption.

5. Even with the cash injection from the $300m bailout, the Star may yet again need further financing (diluting shareholders even more). Lets look at the Star's profitability and also the risks to their future profitability:

--> Adjusted EBITDA has declined year on year, from $426.7m in FY21 to $174.7m in FY24. Adjusted EBITDA for 1HY25 is a loss of 26.4m. Although initially the decline in profitability was due to COVID and loss of the VIP busines, more recently it has been constrained by regulatory reforms which requires the Star to perform due diligence on customers for AML/CTF and implements carded cash limits of $5,000 in Sydney.This appears to have put off customers.

--> Profitability could be further damaged when carded cash play gets implements in Queensland. Further, the current cash limit of $5,000 is expected to be reduced to $1,000.

--> There could be a step up in casino duties implemented by the NSW government, negatively impacting profitability.

--> Currently regulations that the Start faces for its gaming are not equally applied to pubs and clubs. So until the playing field is made level, pubs and clubs will continue to take more gaming market share from the Star. The Star Sydney had 9.3% market share of EGMS in FY18 and in 1H FY25 the market share is 4,5%. For the Star Gold Coast market share went from 33.9% to 26.5% in the same time period

6. There are ongoing disputes which may lead to a drain to cashflows (at a time when cash is critical):

--> AUSTRAC penalties.

--> ATO disputes (GST and withholding tax)

--> Pending settlement with Multiplex (in relation to the Gold Coast Towers)

Overall, I think the risks associated with the Star are too many to properly make an assessment about its future profitability from an investment point of view.