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The second Star Entertainment Group recapitalisation this year has just been completed. With $750m more in cash, the company is happy. ‘The capital structure initiatives will provide The Star with a strengthened balance sheet to deliver on its key strategic priorities and to meet the capital requirements provisioned for,’ declared CEO Robbie Cooke … back in February when the company completed a $595m recapitalisation. Yet that wasn’t enough to last it 7 months.
This time Cooke said,’ With an optimised capital structure, strengthened balance sheet and enhanced flexibility, we have a strong platform from which to deliver on our renewal program and strategic priorities’.
Certainly it does for now…but for how long? Will it be going cap in hand to investors in another 7 months from now at another 50% discount to the price it just raised capital at? Maybe not. But investors have every right to wonder if they can believe anything this company says.
Was another Star Entertainment Group recapitalisation necessary?
Short answer: Yes.
Star closed FY23 with $88.7m in cash – a figure that was actually $6.7m higher than last year. It recorded $1.9bn in gross revenue, up 22%, a $41m underlying profit (up 230%) and a $2.4bn statutory loss.
The difference between the latter two figures are mostly explained by impairments of its properties, ongoing regulatory and legal costs. But the company feared what could be coming its way:
- AUSTRAC penalties,
- Four shareholder class actions,
- unpaid casino duties,
- fines from state regulators
- Competition from Crown
- Cutbacks in consumer discretionary spending
- The slow return of High Net Worth Chinese tourists and uncertainty as to when (or indeed if) they will ever return in their pre-COVID numbers.
- Its contribution to development at its Queensland properties, and;
- Potential debt repayments
The latter of these has been resolved by this deal. The new debt arrangements mean its debts don’t start to mature for another 4 years. It is anyone’s guess what will happen with the penalties. But even if Star can cut a deal, we highly doubt the regulators or shareholders will be willing to walk away with nothing.
In the company’s favour is that the NSW government has backed down on its plans to levy an extra $120m on them and will now just slug them $10m. At the time, we argued it was a huge detriment to its value. But while this potential killer blow is gone, it doesn’t mean the company is not being hit.
To answer the question in the title of this article: it will depend on the extent of all the factors above. It wouldn’t surprise us in the slightest to see another deal (but it would surprise us to see a deal done at anything less than a 30% discount to the share price to this deal).
What we think Star is worth
Our preferred way to value Star has been to use an 8x EV/EBITDA valuation because this was the multiple Crown was acquired at (albeit at FY19 multiples). The consensus EBITDA for FY24 is $306.4m which would lead to an Enterprise Value of $2.45bn.
At its pre-deal capital structure (with net debt of $668.5m), this is a market capitalisation of $1.78bn. With 1.6bn in shares on issue, this is $1.10 per share. Although this is nearly double the 60c per share the deal was completed at, it is a discount to the $1.20 per share the February deal was completed at. We won’t recalculate our valuation for the company’s new capital structure just yet while the deal is still being completed. But the bottom line is this is a business that is barely bringing in enough money to pay its bills to fund existing operations and is facing a number of tailwinds.
While some of these tailwinds may not be as bad as they could be (i.e. if the company does deals to please regulators and shareholders), we doubt they will go away completely. So, while Star may seem a classic ‘buy the dip’ opportunity and it is up for debate as to how it will go…no one can deny is a case of buyer beware…as those who bought in at $1.10 per share back in February would tell you.
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