Just how big of a hit will the $120m NSW casino tax be for Star Entertainment Group?
Nick Sundich, December 20, 2022
Star Entertainment Group (ASX: SGR) shares have taken a fresh hit thanks to investor fears over the NSW casino tax. Are investor fears overblown, how big will the hit be and is there any hope for shareholders?
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Star Entertainment Group might have been valuable but for the NSW casino tax
We have built a DCF model for the Star Entertainment Group with an implied price of $3.17 a share. For most of the last 6 months, this was not a hefty premium. Now, however, it is a 50% premium to the share price after yesterday’s drop.
Star Entertainment Group (ASX:SGR) share price chart before and after the NSW casino tax hit (Graph: TradingView)
NSW casino tax a fresh blow
Three months out from the election, the NSW government decided to increase the tax rates Star pays on poker machines. This tax hike has been estimated to be an extra $120m a year to the company.
If we add $120m to NSW taxes each year over the life of our model, our DCF value drops to $1.98. And this does not account for the increased implementation, compliance and legal costs.
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Any hope for Star Entertainment Group?
We think the best hope for Star shareholders is a takeover. We have modelled a handful of scenarios for the company.
Crown was taken over at 8.5x EBITDA. That deal used the EBITDA level for FY19 given the impact of the pandemic on the casino industry. Considering Star made $552.8m in EBITDA during that year, a potential transaction would represent an Enterprise Value of $4.7bn and a value per share of $4.96 – more than double the current share price.
NSW casino tax could dent a takeover too
If you want to use forecasted FY23 EBITDA, guessing the transaction value is more difficult. Consensus estimates call for $458.3m, at least prior to the casino tax. Considering the average casino M&A deal multiple is 8-10, that could be between $3.87 and $4.84.
We had ~$309m EBITDA for FY23 – our model assumed 5% revenue growth and that expenses remained roughly the same as a percentage of revenues. Our ‘best case’ scenario was $3.27 per share, representing 10x EBITDA. If we add in the NSW casino tax, our EBITDA drops to $190m and our value drops to $2.01 per share. Decrease the EBITDA multiple to 8x causes a further drop to $1.60 per share.
Investors should stay away
Even before the NSW casino tax was announced, we believed Star Entertainment Group was not a BUY based on fundamentals alone. Investors willing to bet that the company will be taken over might find some value in shares. But it is always risky to hold a company simply because you think it will be acquired. And the NSW casino tax would make any deal valuation lower than it otherwise would be.
In our view, investors should wait until the stock is in an uptrend again.
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