Star Entertainment Earnings: Remediation Woes Linger

We maintain our AUD 1.80 fair value estimate for no-moat Star Entertainment SGR. Underlying fiscal 2023 EBITDA lifted 34% to AUD 317 million, about 6% above our forecast. Reduced pandemic restrictions allowed significant revenue and earnings growth across all properties. But earnings remain materially below pre-COVID-19 levels as regulatory operating restrictions and exclusions have been exacerbated by weaker consumer spending. We lower our fiscal 2024 EBITDA forecast by about 8% to AUD 341 million, largely due to lingering remediation costs and lower VIP gaming forecasts. But our EBITDA forecasts from fiscal 2026 are largely unchanged, and Star shares screen materially undervalued. We think investors are too focused on near-term headwinds, overlooking Star’s earnings potential as conditions normalize.

There were about AUD 40 million in remediation costs in fiscal 2023, notably in headcount and external compliance consultants. But these costs are set to linger. Initially, only about half the remediation costs were flagged to recur from fiscal 2024. Star now expects this step down in fiscal 2026. We think this is likely to push out the recovery in VIP gaming. We now expect the suspension of VIP gaming to persist through fiscal 2024 as Star focusses on proving it is suitable to hold its casino licenses.

Significant items of AUD 2.8 billion were declared in fiscal 2023. Star made AUD 2.2 billion in impairments to its three casinos. We expect the bulk is due to The Star Sydney, given the elevated duty rates, in addition to softer group earnings and regulatory headwinds for the portfolio. As the impairment is noncash, it does not affect our discounted cash flow model, or our valuation. We already factored in significant damage to future earnings, and the assumptions Star is making for asset values do not compel us to make further material changes. The write-down merely serves to illustrate the difficult operating environment facing Star.