Star Entertainment bearish ahead of results as regulatory cost bites

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The Star Entertainment Group has warned the cost of remediation payments, regulatory changes and increased competition are eating into its earnings, limiting its post-COVID recovery.

Reining in market expectations a week before its scheduled results, the ASX-listed casino giant warned on Monday its revenue dropped 1 per cent on pre-pandemic levels in the December half, and it now expects underlying earnings before interest, tax, depreciation and amortisation- the metric most heavily watched by investors – of between $330 million to $360 million for the financial year. That compares to $237 million in 2022, which was heavily affected by pandemic lockdowns.

Its shares slumped 24 cents, or 13.1 per cent, to $1.63 in mid-morning trade.

The Star has released a bearish outlook ahead of its half-year results next week. Credit:Edwina Pickles

The Star estimates its remediation costs to total between $35 million to $45 million this year. Half of this is expected to be recurring from next financial year. The group flagged a non-cash impairment charge between $400 million to $1.6 billion in the half-year results due to the cost of operational changes, changes to the NSW Casino Control Act and a potential increase in NSW casino duty rates.

“Whilst the outcome of recent regulatory and legislative developments remains uncertain, we have taken a prudent approach to assessing the carrying value of our assets, which has resulted in a non-cash impairment charge which will be recognised in our [first-half] results,” Cooke said.

“Our key priority is to regain the trust of our community and demonstrate to our regulators that we are suitable to hold our casino licences. Aligned to that, we continue to support the NSW Premier’s initiatives around cashless gaming and improved harm minimisation across the industry.”

Slumping Sydney revenue

The trading update also revealed the Star’s flagship Sydney casino’s revenue has been flailing 13.5 per cent below pre-COVID-19 levels despite the Gold Coast casino’s revenue increasing by 30 per cent on 2019, its highest level on record, and Treasury Brisbane’s revenue increasing by 9 per cent. The group is due to report is audited half-year results on February 23.

Two independent inquiries in Queensland and New South Wales recommended The Star be stripped of its casino licences, following a 2021 investigation by The Sydney Morning Herald, The Age and 60 Minutes. The investigation alleged the company enabled suspected money laundering, large-scale fraud and foreign interference in its Australian casinos, even though its board was warned its anti-money-laundering controls were failing.

The embattled casino group will pay its $100 million penalty to the NSW Independent Casino Commission following the findings of the state’s independent Bell inquiry in three instalments; $30 million by March 31st, $30 million by June 30th and the final $40 million by December 29th. The Star has also fronted the costs incurred by former state regulator the Independent Liquor and Gaming Authority (ILGA) in connection with the review – totalling $7 million last month.

The casino operator is further bracing for fines totalling hundreds of millions of dollars after the financial watchdog AUSTRAC launched civil penalty proceedings against it in December over alleged systemic non-compliance with Australia’s anti-money laundering and counter-terrorism financing laws.

More than $600 million was wiped from The Star’s market value in December after the NSW government announced a proposed tax hike on table games and poker machine earnings in the state’s two casinos.

Casino poker machines would attract a top tax rate of 60.67 per cent under the proposed increase, which is expected to take effect from July next year despite existing tax arrangements between the state government and the two casino groups. It’s been the subject of controversy among industry leaders, shareholders and analysts, who fear the proposal raises sovereign risk issues and an uneven tax environment.

“The Star understands the proposed changes will require legislation to be passed by the NSW Parliament, unless the NSW Government and The Star reach agreement,” the ASX update said.

“If implemented in their current form, the proposed duty rate increases would have a significant adverse impact on the profitability of The Star Sydney, further compounded by the changing operating and competitive environment.”

The Star also announced initiatives expected to generate $40 million annually from 2024, including replacing its contractor “surge” with full-time resources, improving cost control and implementing new loyalty benefits and pricing measures to address competition with rival Crown Resorts in Sydney.

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