Key Points: 


  • Star Entertainment (SGR) is trading at a 45% discount to Morningstar's fair value estimate
  • The company's share price has tumbled on the back of regulatory and compliance issues
  • Angus Hewitt says investors should require a greater margin of safety, but that market pessimism is overblown
  • Star will report half year earnings this week



Angus Hewitt
: So, there's a few challenges facing Star. There's really three of them. So, first, regulation in New South Wales and Queensland. The casino regulators in each of those states has found Star unsuitable to hold a casino license. And they've also got a fine from AUSTRAC, which appears likely. Secondly, you've got increased casino levies in New South Wales proposed by the current government, which looks set to hit Star at about or a bit over $100 million a year from 2024. And then, thirdly, you've got competition. So, Crown Sydney has opened up in August last year and that's competing with Star Sydney, which is the vast majority of Star's earnings is in the Sydney casino.

Yeah, we do. So, on the regulatory side of things, there's increased costs coming here. So, in order to prove suitability Star is needed to bolster, particularly, its compliance team. It's going to report additional costs of about $20 million. That's $40 million for the whole year. About half of those are going to be recurring. And there's also been some operational changes as well, so increased number of excluded patrons and reduced level of complementary services in private rooms is also weighing on their revenue at Star Sydney. But we do think Star will eventually prove suitability in both Sydney and in its Queensland casinos and ultimately, maintain its casino licenses. We think that this increased uncertainty in New South Wales and Queensland does mean investors should require a greater margin of safety. But at current depressed prices, we think Star presents a good opportunity for investors to capitalize on pessimism, which we think has become overblown.