Corporate Action: Star’s Prereported Interim Result Is Overshadowed by Its Capital Raising

We lower our fair value estimate for shares in no-moat Star Entertainment SGR 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.

On balance, we recommend shareholders subscribe to the rights issue, provided it is consistent with individual investing goals. Despite being dilutive to our fair value estimate, the offer is appealing on valuation grounds. The AUD 1.20 rights price represents a 14% discount to the theoretical ex-rights price of AUD 1.39 per share, and a 37% discount to our updated fair value estimate. The institutional placement will take place on Feb. 23, 2022. The retail entitlement offer opens on March 2, 2023, and closes on March 13, 2023. Shares will be trading ex-rights when Star recommences trading on Feb. 24, 2023.

The majority of the raise will pay down debt and provide liquidity headroom. Pro forma net debt/EBITDA was reduced to 0.8 after the raise, providing headroom well below Star’s target gearing of between 2.0 and 2.5 over the long term. Star will need it, with AUD 200 million in penalties from the New South Wales and Queensland regulators, a yet-to-be determined fine from AUSTRAC (Star estimates this to come in at around AUD 150 million), and now sharply lower earnings over the near term putting pressure on existing covenants.