Star Entertainment’s increased regulatory certainty

Morningstar Equity Analyst Angus Hewitt maintained his $1.80 fair value estimate for shares in no-moat Star Entertainment (ASX: SGR) following an update to the duty rates it pays in New South Wales. The amended duties effectively grant a transitional period for increased levies originally proposed by the prior state government, and removes a key piece of regulatory uncertainty that has been overhanging the embattled casino.

Cumulatively, Star is set to pay less tax over the next decade than we had previously expected. In isolation, this change is worth about 6% to our valuation.

But Hewitt’s valuation remains intact as the increase to his earnings forecasts is largely offset by an increase to his expectation for the potential Austrac fine to about $330 million, from $150 million previously. While there remains considerable uncertainty around the quantum of the Austrac fine, Hewitt now thinks Star's $150 million provision for the fine is beginning to appear optimistic. He estimates that of the potential Austrac fine on a pro rata basis of the $450 million fine Crown paid and the relative revenue of the two casinos. In the four years to pre-COVID-19 fiscal 2019, Star's revenue was about 74% of Crown's, with a larger high roller footprint.

While increased duties for high roller and table gaming will take effect as proposed, the reprieve is with electronic gaming machines. Star will maintain its current EGM duties through fiscal 2030, which ratchet up to about 23%, before GST. From fiscal 2031, the new progressive duty rates apply to EGM revenue, with a top duty rate of about 52%. During the transitional period through fiscal 2030, Star will pay an additional levy of 35% on all gaming revenue above $1.125 billion.

The benefits of the amended rates are therefore strongest in the near term while gaming revenue at the Sydney casino remains below the additional levy threshold. This is crucial for Star as it turns business performance around and eventually prove suitability to maintain its casino licence.