Australia – Star warns of financial struggles at Sydney casino with possible impairment charge of A$1.6bnBy Phil - 13 February 2023
In an update to the ASX, Australian casino operator The Star Entertainment Group has said its flagship Sydney casino has struggled over the first half of its financial year due to a government review and increased competition from Crown Sydney, causing it to warn investors of an impairment charge of between A$400m and A$1.6bn in its six month performance.
The operator highlighted operational changes following a government review as well as the potential for an increase in state casino duty taxes for denting its performance. The Star Gold Coast’s domestic revenue was up 30 per cent on pre-COVID levels, achieving its higher revenue result on record. Treasury Brisbane’s domestic revenue was up nine per cent on pre-COVID levels, with record performance across slots, main gaming floor tables and hospitality. But The Star Sydney’s domestic revenue was down 13.5 per cent on pre-COVID levels. Overall, group revenue was down one per cent on pre-COVID levels.
It stated: “First half earnings have been impacted by operational changes arising from the Bell and Gotterson Reviews, a step-up in remediation costs and increased competition in Sydney. Whilst The Star’s Queensland Casinos performed strongly in the period, the operating environment for The Star Sydney has been more challenging. The Star Sydney trading performance has been adversely impacted by several factors, in particular by increased operating restrictions from mid-September following the Bell Review and amendments to the NSW Casino Control Act. This saw an increase in the number of excluded patrons and a reduced level of complimentary services and benefits in private gaming areas (impacting both slots and table games performance). The Star has also been impacted by increased competition since the opening of Crown Sydney in August 2022.
“Further, and consistent with the Group’s ongoing remediation actions, The Star has continued to invest in improved compliance capabilities and incurred remediation costs of A$20m in its first half. This included a significant increase in headcount including the use of ‘surge’ third party consultants to improve compliance processes as the Group seeks to return to licence suitability. Subject to completion of the auditor review process and finalisation of the financial statements for the first half, The Star expects to report underlying EBITDA of $195m to $205m.
“Due to the impact of operational changes implemented following the Bell Review, amendments to the NSW Casino Control Act as well as the potential for an increase in NSW casino duty rates starting in FY24, The Star is anticipating a non-cash impairment charge in relation to its NSW business in the range of $400m to $1.6bn in its 1H FY23 results.”
Based on current trading performance and the outlook for the remainder of the second half, the Group now expects to report underlying EBITDA of $330m to $360m for the year ending 30 June 2023.
The operator added: “The end of year position will be dependent upon a number of factors which are uncertain at this time, including regulatory settings relating to complimentary services in The Star Sydney’s private gaming areas, the level of inbound international tourism, and general consumer discretionary spending behavior.
While remediation remains the key focus, in order to respond to the current trading environment,
The Star intends to implement a number of focused operational initiatives designed to improve its trading performance. These initiatives are expected to contribute only marginally in the last quarter of the FY23 period, and no impact is assumed in the above guidance for FY23. On an annualised basis, these initiatives are estimated to contribute in the order of $40m to the Group’s operating performance.
These initiatives are expected to include replacing contractor ‘surge’ resourcing with full time resources, uplifting The Star Sydney’s performance, implementing measures to improve The Star Sydney’s operating efficiency and cost control, enhancing the customer experience at The Star Sydney; and actions to respond to the Group’s competitive position in Sydney including loyalty benefits and pricing.
The Star and the NSW Government are in discussions on the implementation of the proposed changes
to NSW casino duty rates. It understands the proposed changes will require legislation to be passed by the NSW Parliament, unless the NSW Government and The Star reach agreement.
It warned: “If implemented in their current form, the proposed duty rate increases would have a significant adverse impact on the profitability of The Star Sydney, further compounded by the changing operating and competitive environment as described above. In this scenario, The Star intends to undertake an urgent review of The Star Sydney’s operating model and assets, with a view to maximising value for the group’s shareholders.
Group CEO and Managing Director Robbie Cooke said: “We have been pleased with the ongoing
strength of trading across our Queensland based properties, while trading at The Star Sydney has been impacted by operational changes associated with the outcome of the Bell Review as well as competition from Crown Sydney. Whilst the outcome of recent regulatory and legislative developments remains uncertain, we have taken a prudent approach to assessing the carrying value of our assets, which has resulted in a non-cash impairment charge which will be recognised in our 1H FY23 results.
“We are engaged in constructive discussions with the NSW Government in relation to the proposed
casino duty rate changes. We are singularly focused on working with our regulators and the NSW Manager and Queensland Special Manager to remediate our businesses, as we seek to return to suitability. Our key priority is to regain the trust of our community and demonstrate to our regulators that we are suitable to hold our casino licences. Aligned to that, we continue to support the NSW Premier’s initiatives around cashless gaming and improved harm minimisation across the industry.”