Should you bet on Star Entertainment? Investor Webinar 6 September 2023

 

In this week’s Investor Webinar we talk about Star Entertainment Group (ASX:SGR) and Zoom2U Technologies  (ASX:Z2U)

 

– What the heck is Zoom2U (ASX:Z2U)?

– Is it time to take a punt on Star Entertainment Group (ASX:SGR)?

See full transcription below.

 

What are the Best stocks to invest in right now?

Check our buy/sell stock tips

 

 

Transcription

 

Marc: Good morning, on Wednesday, 6th September. Morning, Stuart.

Stuart: Morning.

Marc: You wanna talk about gambling a bit later on, right? You’ll be talking about The Star. But let’s kick it off with Zoom2u. So, when you say Zoom2u, it sort of reminds me of Zoom, the video conferencing system. But it’s something completely different.

Stuart: Absolutely. One of the things I love to find in our market is a company with a ridiculous name. And let’s face it, Marc, Zoom2u does sound a bit ridiculous, right?

Marc: It does, yeah.

Stuart: Right. Companies with ridiculous names, according to Peter Lynch, have more chance of going up. That’s why he bought the Pep Boys, the auto parts distributor from Philadelphia. Pep Boys’ real name was The Pep Boys – Manny, Moe & Jack, which sounded pretty ridiculous, but backing that up was a pretty strong business. But we digress. Let’s talk about Zoom2u. ASX:Z2U is the code.

Marc and I have been noticing a recovery in tech stocks. It’s clear now that interest rates have peaked in Australia and potentially are heading down. With the end of the interest rate-increasing cycle, you can potentially see tech stocks recovering again. This is a candidate here that’s worth taking a look at. And there’s the chart there. As you can see, it’s bottomed in recent months and started to levitate a bit. A couple of directors are buying this one. As you know, I look at director buying every day, and a couple of directors, including the founder has been active in this one. So, that piqued my interest and prompted me to go take a look.

So what is Zoom2u? Last-mile delivery SaaS platform. So every day you’ve got delivery people out on motorbikes or bicycles delivering things. And what Steve Orenstein and his colleagues set out to create with Zoom2u was a SaaS platform that could work globally, that would connect up couriers with people who had things to deliver. That business has grown quite nicely over the last few years. They reached 4 million in revenue in calendar 2022. And in the most recent quarter, the June 2023 quarter, they had revenue up 47% year on year. So, this business is scratching where the market is itching in terms of being able to provide a platform that easily allows couriers to connect up with people with stuff to deliver. Not yet profitable. They’ve burned about half a million in that quarter, the June quarter, but they’ve got 3.9 million cash remaining.

So, what Steve Orenstein and his colleague Michael Gayst have spotted is the market capitalizing a pretty strong growth platform at not much at all on ASX, given the way in which stocks have been beaten around. Marc, I suspect a lot of our viewers will not have even heard of Zoom2u. It was one of many tech stocks that came to the market in the last few years, and in many cases then got beaten up heavily when the tech wreck of 2022 happened. This is a potential recovery play because I don’t think they’re far off profitability. I flagged another one recently in terms of Jayride, ASX:JAY. This company sits in the same category.

Marc: Right. Yeah. I remember we spoke to Zoom2u about two years ago. We met up with them. But, Stuart, how is this one different from Yojee, for instance? Because Yojee’s got, especially in Indonesia, they’re quite sort of big in terms of, you know, connecting really small companies to people that need stuff delivered, right? So, where do these guys sit?

Stuart: These people have a platform that works slightly better, and they’ve started in first-world geographies rather than the emerging world. And I think that can make the difference. So, you get it to work in a first-world jurisdiction, you can then take it to the third-world. If there’s a difference, say Yojee’s the other way around. Sorry, not third-world, so much as emerging world. That’s a question we’ll have to ponder some more as we look into this one. But I think the proof speaks for itself. They’ve created a platform that people are actually using and to the point where it’s almost profitable. There’s room for many companies in this space.

Marc: Would you say, jumping on stocks like this is a gamble, and, you know, cheeky bridge to the next one, but…

Stuart: Well, I’m really looking forward to presenting to you my ideas on Star Entertainment Group. I’m, as you know, a natural-born contrarian. I love coming up with views that are minority to the way the majority thinks in life and in the markets. And I’ve never seen a more contrarian opportunity in 30 years of following markets than I have in Star. I think the closest I could think of to a company that was very contrarian and then turned around was NewsCorp during the recapitalization of the early ’90s. This one is comparable to that in terms of the potential upside if the current management team can get this one right. So, let’s take a look.

Marc: Yeah. And just sort of setting the scene here. You’ve been talking about The Star for a while, but, you know, out of the blue or out of left field, we have, for instance, that tax issue with the New South Wales government. So, this company’s been hit a bunch of times in a row, and sort of, it seems to be stabilizing, but the history, the recent history isn’t very upbeat, is it? In terms of…

Stuart: And that’s what I like about it. Eventually, they stopped getting left-field stuff thrown at them and get to operate a reasonably good business, is what I’m arguing. You’ve gotta watch carefully. And as you know, I’ve been talking about the stock at higher levels than the stock is trading at now. So, let’s set the scene and see whether people are in for a serious gamble. What is The Star? Well, first of all, everyone hates The Star. There’s the chart. Stock recovered nicely after like, the COVID pandemic panic of 2020. But then everything started to go wrong in 2021, and this stock is almost unrecognizable in 2022. So that’s the scene. And as Marc rightly pointed out, everything that has gone wrong will go wrong.

So, what does The Star do? They operate casino properties in New South Wales and Queensland, with hotels and entertainment facilities attached. What’s the everything that’s gone wrong? Basically, sometime around 2010, the casinos became targets for money laundering, organized crime, fraud, and maybe possibly foreign interference in Australia. So, not a very well-managed company in terms of that level of corporate oversight to keep the bad guys out. And let’s face it, Marc, casinos have always tended to attract, shall we say, dirty money. And so, the aim of the game is always to be very clean. Star went off the rails in that regard.

Then Crown showed up and created a second casino. So the belief was that the money train that had previously driven Star had gone. As word got out about some of the wrongdoings in terms of money laundering, there were two reviews, the Bell review in New South Wales, the Gotterson review in Queensland. Once they got through their work and found out the extent of the wrongdoing, they were able to levy $100 million fines in each state. The regulators suspended the licenses. They didn’t actually close the casinos. So they put special administrators in to keep an eye on them, but business went on as usual within the casinos. ASIC got involved and are now suing multiple directors. I’ve left off this list of stuff that’s gone wrong. AUSTRAC, the people who keep track of movements of money in and out of Australia, they’re investigating carefully. There’s class action lawsuits going on. When I started talking to you, Marc, that was before…

Marc: Sounds like a gem, Stuart, this one.

Stuart: Look, someone in charge of The Star broke a mirror or killed a cat, or whatever it is you do to get seven years of bad luck. Because, Marc, can you think of any longer litany of errors of a company than this one in terms of stuff it’s tripping over? Now, I thought they had about enough when I started telling you about it quite enthusiastically. And then shortly after that came the second last bullet point on that list, the extra taxes that New South Wales decided to levy. And then that banged the stock down again. Moving to the current year, new CEO, Robbie Cooke realized he needed some firepower in terms of balance sheet, and he worked with Barrenjoey and others to do a recapitalization. They raised about $800 million, but that proved to be slightly dilutive. So, from a shareholder perspective, I would argue just about everything that can go wrong with this company has gone wrong at this point and it’s reflected in the current share price.

Now, what could potentially go right? Well, the first one already has gone right. The man on the right side of the screen there, Mr. Robbie Cooke, new broom to come in with a mandate to clean shop. He spent a lot of his career in the gaming industry, although he did spend some time as CEO of Tyro Payments. And basically, Robbie’s got a mandate to go out and sweep under every single carpet and get every last bit of dirt that’s clinging to this company. If he doesn’t do that, his own job and potential upside is on the line here. So he’s bringing in a team that is cleaning shop quite vigorously. Given the level of scrutiny, not just from the regulators, but from the media, he can’t get away with turning a blind eye to anything. So, that’s the first thing that’s gone right.

The second thing is the punters should keep going up. I was at a function at The Star here in Sydney a few weekends ago. This is not just a gambling den, it’s actually a major entertainment facility and conference facilities. So, I was at the conference, and basically, it looked like it was business as usual in terms of the amount of traffic through the property when I was there.

Meantime, there’s a whole lot of property that this company owns that it’s doing things for, most notably in Brisbane with its Queen’s Wharf development, but there are others, and they’re all progressing well. But the important thing is the first bullet point on that scene. Suddenly out of nowhere the new New South Wales government, so the extra taxes were levied by the old government, we had an election here in New South Wales early this year. The new New South Wales government’s realizing that if they tax the casino as heavily as they intend, it could have the unintended consequence of job losses.

Marc: That must be a world’s first, Stuart. A labor government levying lower taxes than in liberal government. That’s…

Stuart: Yeah, it’s extraordinary. I’m really surprised what a moderate government Chris Minns is leading here in New South Wales. And what Daniel Mookhey, his treasurer has realized is that you’d have thousands of jobs on the line if they taxed this casino out of business. So, they’ve changed the way in which they’ll tax the poker machine duties. They won’t kick in until 2027, but at a much lower rate, and they’ll stay at that same lower rate until 2030. So, thousands of jobs saved, many of those, I suspect might vote labor as a result of that. But you markedly improve the profitability of the Sydney Casino and property as a result of that. So basically, it’s the first thing that’s gone right for them from a regulatory perspective in a long time. And when you throw in the fact that it’s still a valuable tourist destination, I think there’s potential for whoever invests in this at the right time can start to benefit from some of this upside.

So, let’s ask the question what else can go right? Well, as I’ve said before, they’re still prime tourist attractions. Queen’s Wharf up in Brisbane, which will feature a Star Casino, that’s coming early next year. So that’s making some progress as well. Multiple smaller development opportunities. I’ve flagged on this slide here that Chinese visitors may come back. Now, if you recall, I’ve been flagging that potentially China’s economy could be in trouble to the point where Chinese people aren’t traveling anywhere very much, but if they do, they might just be coming back to Australia and visiting the casinos again, in which case, you’ll see an uptick in traffic back to the levels we saw several years ago.

So, basically, I think that so long as nothing else comes outta left field to beat this company up, it’s generally up from here. What was that song from the ’80s?

The only way is up, baby
For you and me now.

That’s the optimistic song they’re singing in The Star boardroom right now. So, the result wasn’t too bad. EBITDA are up in FY23. In fact, they came slightly over the top end of the range of the previous guidance, and no surprises there. They were able to execute a cost-out program. So there’s been some layoffs across the group and other costs which have gone out. The Queen’s Wharf I think was intended for late ’23. It will now go live in ’24, but they still made progress on that.

Importantly, when you look at the news now, things aren’t getting worse on the regulatory front. So, there are various things that they need to do to satisfy the regulators that they represent, a fit and proper person in terms of owning casino licenses. And I suspect at some point they’ll get those licenses back. It’s slightly complicated. In Queensland, the license was suspended, but they weren’t gonna bring it into action until December of this year when it happened. So, basically, it’s the big slap across the knuckles was the announcement from the regulator, but it didn’t mean they suddenly had to shut down because there was no license. But the company was confidently able to say that they had met some of the concerns of the regulator and were making progress in that regard.

So, what’s coming up? They’re carrying a lot less debt than they were last year. But there’s talk of another refinancing that could make their balance sheet even better, which would be good. You’ve got Queen’s Wharf opening next year, and that’ll be a major new tourist attraction in Brisbane. And as you know, Marc, our nickname around the country for Brisbane is Bris Vegas. People go to Brisbane, by and large, to have a good time. And this is one more entertainment option with a casino attached that Bris Vegaians are gonna like.

Gold Coast, they’ve got a property there where they’ve built a new tower, and late in ’24 that’ll be open. So, there’s a couple thousand more hotel rooms there. So an expansion in the works there. Look, the thing that I’m seeing is private equity moving in. Gaming is generally a growth industry wherever you go around the world, and there are people who in private equity who know it well. Your key risk is first of all, ethical risk. You’ve gotta be a fit and proper person. So, no connections to organized crime or any of the other bad stuff. But the second thing is management of the risk. There’ll be a certain theoretical win rate. Some years you’ll be in, some years you’ll be out, but you’ve gotta manage the property. So, your theoretical win rate comes in at what the statistician state would be. And at that point, as you know, the house always wins, which means there’s plenty of cash flow for the new owners.

So, I am postulating that the breakup value of The Star is considerably more than the 97 cents that’s talking about… I’m seeing people doing DCFs where you get more than 2.50 dollars a share, for example, or price to book, you could justify close to two dollars, for example. So, private equity players with deep pockets can come in and benefit from the fact that Robbie Cooke is already a new broom, and get all the upside that’s not in the current share price at the moment.

Now, what you are gonna say to me, Marc, is, yeah, “What else can go wrong?” Because you didn’t expect those extra taxes to show up. So, yeah, let’s face it, and let’s address that issue. Gaming in Australia has become public enemy number one in some circles. So the argument why the New South Wales government bought in extra taxes is Premier Dominic Perrottet at the time was very anti-gambling. And so, this was just him playing no more Mr. Nice Guy with the gaming industry. So, you might see some kind of regulatory moves from, I don’t know, the Queensland government or maybe even federally, which make it tougher to run a casino property. I doubt it because Australians by and large love a punt and like a good time out at a place like The Star. So, I suspect those taxes from last year were the worst. But yeah, there’s always the risk hanging out there that some killjoy wants to make life more difficult for Star because they offer shock horror gaming services.

Marc: So, the unknown unknowns, that’s always hard, right? You can’t predict those. But what about the class actions that are still running, and the current things they’ve got on? What sort of damage could that do? And I know class actions, yeah, there’s provisions for that. And typically, once that news comes out, actually, the market doesn’t perceive it as that bad anymore because it’s been sort of discounted into the share price, but where are we sitting at with that?

Stuart: So, class actions are happening all the time. One of the most profitable areas of the law today in Australia is securities litigation. So, it’s a great way to make a living if you’re a smart corporation’s lawyer who knows this sort of stuff. And it makes for great publicity. Switch on the evening news, and there might be some action from the courtroom if indeed this stuff goes to court. Usually, securities litigation does not go to court. Companies end up settling out of court, and, you know, with the provisions they’ve already made. But occasionally, that’s bad for publicity.

Look, the known unknowns is the level to which negative media coverage of The Star’s issues would then feed through to investor perception. I’ve noticed that the analyst target prices have been coming down with the share price. So, it’s hard to find an analyst who’s willing to stand out from the crowd and say, “This is a strong buy.” And obviously, they’re influenced by the share price, and the share price is influenced by sentiment, and sentiment, regrettably is probably influenced by the ABC News. Having said that, even the analysts are finding it hard to go much lower than a buck-thirty five a share. Is their average target price, which is way above the 97 cents it’s trading at the moment.

Marc: Yeah. So the question for investors is, okay, so there’s a lot of stuff happening at The Star. There’s some stuff that still needs to be clarified as in, you know, what the impact will be money-wise. So, if you wanna take a punt on a company like this, what’s your upside at the moment realistically? And I’m not talking about what private equity might pay, because that’s an unknown unknown I’d say, at least for the outsiders. Well, what’s the realistic upside here, and what’s the downside, more importantly? Where could this drop to if things go badly?

Stuart: Well, we’re at a low that we’ve never seen, and stocks that get this low find it hard to go much lower, is what I would say. What’s the upside? My sense of it is probably closer to, look at that downswing from about August 21 to the present and go halfway, and looking up-close to the screen, I can see that’s about a buck-eighty. So, you could easily justify a buck-eighty on numerous measures. So that’s your potential upside. The catalyst about when you get in is, and it’d be interesting to see this. If there’s a window where directors are allowed to buy this stock and you actually see director buying, that’s the giveaway that they’ve turned the corner in terms of potentially being fixed up.

Marc: Right, that should be right about now, Stu, after the annual numbers. There should be a window for directors…

Stuart: Yeah, that’s right. So I watched this carefully and I haven’t seen it. Look, the toughest job in the world in Australia right now is having Robbie Cooke’s job. So, Robbie, if you’re watching this broadcast, our thoughts and prayers go with you because it’s kind of tough to be doing what you are doing. Look, Robbie has other options to fall back on if The Star doesn’t work out. He’s part owner of the Stone & Wood Brewery up at Byron Bay. And in his spare time, a bit of a beer aficionado. So possibly, he and I are kindred spirits in that regard. But yeah, look, if Robbie sort of throws in the towel, that would really scare people away because he’s the new broom you’d want to clean up the mess.

Marc: All right. Well, should you take a punt on The Star? Well, time will tell, I guess.

Stuart: Well, I think we preserve this video because the day when private equity shows up or the stock gets to a buck-eighty… I’m John the Baptist here, the voice crying in the wilderness, prepare the way for a buck-eighty a share.

Marc: Right. Well, it would be 80% upside, right, from here. So, from that point of view, it seems interesting. If only the risk on the downside was known…

Stuart: Now, okay, at this point, we should really flash the screen red. There is risk written all over this thing. This is for Evel Knievels only, basically.

Marc: Right. Yeah, on that note, we’ll wrap it up. So, very interesting, Stuart, on The Star. I know this has been one of your contrarian love babies for a long time. So, hopefully, at some point, it will turn a corner. And yeah, we’ll leave it here. We’ll see you next week.

Stuart: See you next week.