Star Entertainment: Corporate Action—Entitlements Are Cheap

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

Just seven months after raising capital in February, we are surprised by another raise. Net debt in fiscal 2023 was AUD 596 million, representing net debt/EBITDA of about 0.5, well below Star’s long-term gearing target of between 2.0 and 2.5. We thought a tax reprieve from the New South Wales government should have brought additional certainty to lenders as Star looked to refinance its debt. As part of the recapitalization, Star’s newly negotiated debt facilities have more flexible covenants, with a minimum AUD 100 million in liquidity, a minimum EBITDA/net interest of 2.5, and a maximum net debt/EBITDA of 4.

Nevertheless, the rights issue is appealing on valuation grounds. The AUD 0.60 rights price represents a 12% discount to the theoretical ex-rights price of AUD 0.68 per share and a 50% discount to our revised fair value estimate. The institutional placement will take place by Sep. 26. The retail entitlement offer opens on Oct. 3, and closes on Oct. 12. Shares will be trading ex-rights when Star recommences trading on Sep. 27. Shareholders electing not to exercise their rights will become materially diluted.