Star Entertainment Group (ASX:SGR): Where to now in a post-COVID world? Can it avoid a looming cash crunch?

In a July interview with the AFR, Star Entertainment Group boss Steve McCann admitted that his company’s pre-pandemic glory days were never coming back. Specifically, his company would never again see the huge flow of high-end international gamblers flock to its casinos, and would be relying on restaurants and hotels for revenue. We can’t fault him for being honest in that things wouldn’t get better quickly. But is there hope on the horizon for the operator of casinos in Sydney, Brisbane and the Gold Coast?

Actually, we probably shouldn’t bother to answer that question right now because we cannot. Why? Because /star’s shares are suspended on account of the company failing to lodge its account on time. And why didn’t Star lodge its accounts on time? Because its auditors haven’t signed off on it, and the company is reportedly pleading with its lenders for more money and the government for more tax relief. Are these two coincidental? We are not so sure. Let’s first take a step back and see how Star got to this point.

Remembering the glory days

Prior to the pandemic, the biggest money-spinner for the company was high-rollers – a terminology for gamblers with enough money to bet tens (if not hundreds) of thousands of dollars in one night…and perhaps come back the following night even if they lost it all. In some instances, they were specifically invited by the company or by a fellow invitee. Not even holding a Platinum and Diamond star membership could get you into a Sovereign Room. Even if the pandemic never happened, Star was set to face competition from the nearby Crown Casino, but perhaps they could’ve co-existed. Especially because Crown was at the time being dragged  through several inquiries.

How Star Entertainment Group fell in a hole

The pandemic did happen, however, and borders kept many of these high-rollers out. And when they re-opened, they were slow to reappear, not least because of diplomatic tensions between Australia and China, as well as the prolonged closure of China’s own border, not to mention crackdowns by authorities on off-shore gambling.

The company had decent hotel and entertainment precincts and people did come back to these. Although these were luxury tourists from interstate or in countries other than China. And furthermore, these are lower-margin businesses than gambling for high net worth individuals. This is before you even consider the intense competition in the hotel space.

But even though as the saying that ‘the past is a foreign country’ was applicable, there were consequences from the past. In 2022, NSW Senior Council Adam Bell ran an investigation and recommended that Star was unsuitable to run a casino in the state – because it had engaged in many of the illegal activities Crown did. Specifically, Star had hidden criminal gang-linked junket operator Suncity’s illegal cash cage and allowed it to operate a secret gambling room. It found it facilitated ~$900m of banned gambling transactions and had evaded taxes. Bell’s report described Star as,’ A case study of unethical conduct and cultural failure’. And the license was actually stripped. The irony of all this was that shares suffered an even worse decline than during the Corona Crash.

Star Entertainment Group (ASX:SGR) share price chart, log scale (Source: TradingView)

Is there a way out?

Investors have hoped the company could settle into a new normal. It hired a new CEO in Robbie Cooke, but he bit the dust and was replaced by Steve McCann just a couple of months ago. There has been hope that the company could’ve been bought out in the way that Crown was in early 2022. The company successfully raised capital twice in 2023. And the new Minns NSW Labor government backed away from plans to charge an additional $120m in taxes which the company had warned would put it out of business. So are better times ahead? Not so fast.

You see, there’s a reason Star had to raise capital twice. $595m wasn’t enough to last it 6 months. The company told investors it had to refinance its debt and insulate itself from potential forthcoming pressures.

In 2024, Adam Bell was once again been appointed to lead a review into Star, after NSW’s Independent Casino Commission (ICC) indicated it was concerned about the change of pace at the company. The review is due to release in the coming days and will consider whether Star is indeed changing its culture – at least of its own accord rather than just because it has to because the state insisted. Chief Commissioner of the ICC publicly stated that he was dissatisfied with the progress and wasn’t convinced it was appropriate to hand Star its license back. Public evidence was headlined by text messages between company executives using the word ‘war’ in relation to their dealings with the regulator. Chairman David Foster wrote to Cooke, “They are prepping for war, we’d better do the same, should we talk to KWN [King & Wood & Mallesons]?” Cooke wrote back later the same day, “We are meeting Monday to get ready for war.”

Keep in mind that Star’s license is only suspended, it has not been cancelled. So, a cancellation would be the nail in the coffin. Star has conceded in its final submission to the report that it is not suitable to run a casino in its own right, but should be found suitable subject to conditions. The inquiry has also focused on further allegations including falsification of welfare checks on customers. Ex-CEO Robbie Cooke left in April after the regulator expressed no confidence in him, with text messages coming to light implying contempt for the regulator and the manager overseeing the casino.

This is just one of many problems facing Star. The company’s total revenue dropped 3% in the most recent quarter, and gaming revenue fell by even more, 13% in Sydney and 18-23% in Queensland. Cost of living pressures and competition are biting the company. It is also facing a multi-million dollar AUSTRAC fine over its breaches of AML/CTF laws, a legal action from Cypriot businessman Roys Poyiadjis and his family over allegations Star reneged on a deal to sell a $8.6m yacht to him so he could use it for the European summer. Remember plans by famous chef Tetsuya to have a restaurant at the casino? Those fell over, and we’re pretty sure any prospective tenants would be having second thoughts of being affiliated with this company, no matter how lucrative the real estate space.

Even the hiring of Steve McCann as CEO raised eyebrows, with media reports he went off to London just a week after joining. He is being paid a $2.5m cash salary, $7.5m sign-on bonus, $2.5m retention bonus to be paid in FY26 and a no-hurdle, short-term incentive bonus worth $5m at today’s prices.

What now?

McCann said in his first media interview that time and patience was needed to win back gaming licenses and improve the culture. He’s right about that. McCann also said the company was not for sale, something that might anger some investors who would want to capture some cash from their investment.

In absence of some kind of M&A deal however, it is difficult to see a realistic catalyst that would lead to the company reaching pre-pandemic levels again. Forget about high-roller gamblers from China coming back in their pre-COVID numbers, or making the same money from its hotels business either by substantially cutting costs to make the same margins as from gambling. Investors can just thank their lucky stars that this unlucky star was not completely stripped of its license earlier.

Nonetheless, investors wouldn’t be too happy right now given shares are suspended as the company missed the deadline to lodge its annual reports. Media reports suggest it wants to borrow more money given cost blowouts at its Brisbane precinct and its yet to be paid AUSTRAC fine, but lenders (having already coughed up $450m) just can’t bring themselves to trust that it could spend the money wisely – yet. Although the company wants to sell its old Queensland property (now that Queens’ Wharf is open), such a deal could take months to settle.

Spare a thought for poor shareholders who provided not one, but two $750m injections last year and have no recourse whatsoever, at least so long as the company’s shares are suspended. Star is also begging the NSW and Queensland governments for tax relief and while the prospect of Queensland chipping in is possible, not so much for NSW.

We’ll be watching this saga with interest.

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