Was just reading Racing Queensland annual report. It is all COVID, COVID cannot underestimate COVID. Given this report is from last financial year that is no surprise. They must have been in a panic. Now this is not about Racing Queensland, but what I really took away from the report is as Australians we sure love to gamble. So, it got me thinking, Crown cannot get a gaming licence despite spending colossal amounts of money building a casino, so steer clear of them. What about Star Entertainment, especially as they made a play for Crown earlier this year.

To start with there is one on the Gold Coast, so sure, why not use it as an excuse for a short road trip. The place is incredible. Rooms salubrious. They obviously want to make you feel like it’s a place to spend a bit of time. Well what casino doesn’t.  A year after having to stand down 90% of the staff, the place is looking almost back to normal, well until the current SEQ lockdown.

One problem is the cost to keep these places looking swish. For example, they dropped nearly 900M on The Star, Sydney and that was almost a decade ago. It must have worked as the property has awards coming out its hat for the multiple in-house restaurants. 

The group also owns Treasury in Brisbane, the Star in Sydney and manages the Gold Coast Convention Centre as the Queensland government couldn’t be bothered to run it themselves. 

On the cards, yeah, pun intended, they are developing Queens Wharf Brisbane in conjunction with two Honkers based partners. The development which includes 2,000 apartments (isn’t Brisbane oversupplied) and 1100 hotel rooms has a price tag of circa 3B. Its slated for 2022 completion and complete they will have a 99 year lease (the Hong Kong partners probably negotiated that) and the current Treasury Casino will go back to being just a hotel.

With shares still around 40% below 2018 ATH it made me wonder if this was really a place to look. The financial position is in reasonable shape for a business that has been subject to lockdowns and cessation of revenue during this chaos.

If you can handle the volatility and cope with a holding in this industry, I think there is upside as the world reopens. 

Star has withdrawn from the proposed merger with Crown. In my view this is a clever move, the Crown business has become, shall we say, difficult. 

The fact Crown cannot gain a gaming licence in Sydney for their new multi million dollar venue means the properties in other states should surely be under review. 

We can pretend we know that the merger withdrawal is the reason why Star shares are up today. I suspect at least in part it is.

Well the announcement or possibly the press reports that lead to the announcements, lead to a 20% fall in the share price. Either way, investors are blindsided by, in Star own words, actions that are alleged to have occurred in a highly regulated industry.

It might be naive to expect these are not temptations, and the Australian business world is littered with stories of temptation that have been accepted, so it is now a decision on if these allegations are proven accurate, if Star is squeaky clean, or somewhere in between.

If this is feeling like Crown, it should. The joint media investigation accuses Star of allowing suspected money laundering, organised crime, and other questionable activities it the casinos. This follows the operators allegedly overlooking red flag gamblers.

A report in some outlets indicate they have more allegations to follow including Austrac is building a case that may lead to penalties.

This is one I have a decent sized holding (currently smaller by 20%) in my SMSF. It has worked out until now as a reopening play and one I expected would have continued as restrictions lifted.

Will not be selling out immediately, however, it is definitely on the sell trigger button list.

Star released an earnings forecast this morning and not unsurprisingly it was bad with a forecast net loss expected for H1/22 in the $73-75M range.

There was a reference to positives on reopening, and impact for Omicron but we are already familiar with that information. I will be watching to see if people do fill the properties when borders and lives open back up. Suspect it will with a vengeance - for some reason people love these places.

On a less positive (if a $73-73M loss was not enough for you) was the identification of an underpayment of staff. Star is making provisions of around $13M to rectify the situation for current and former staff. Guess the good news take is they identified this, and it was not uncovered in an external audit, or splashed across a newsreel.

Shares started down but finished the day in the green.

Continuing to hold in SMSF.

Matt Bekier, CEO and Managing Director has fallen on his sword and resigned following his attendance at the in-progress review of Star by NSW Independent Liquor & Gaming Authority.

Bekier stated “he is accountable for the effectiveness and adequacy of the company’s process, policies, people and culture", and "...it was the right thing to do was for him to take responsibility."

No departure date has been set.

Executive Chairman John O’Neill is stepping into the CEO seat on an interim basis until a new CEO is appointed to replace Matt Bekier who stood down following his attendance at the Independent Liquor and Gaming Authority review of Star under the Casino Control Act 1992.

O’Neill's take home will be upped by $125k/month (or $1.5M per annum) while he is in the role.

My initial reaction was **** me until I went and looked at what Bekier comp was as Managing Director and CEO $3,609,870.

April 1 and none of this is a joke.

Rick,

I totally agree. My understanding is the $100m was the maximum fine the NSW regulator could levy. This mightn't be the last fine they get - they still have to deal with the Qld regulator and also Austrac re: AML. It could add up to a lot more.

I understand the financial impact on suppliers/employees but why can't they set a timetable for exit - give the company the opportunity to sell and/or have the asset forcibly transferred to another operator?

Not owned IRL or SM (nor ever...)

Well, we knew the results would be bad, however, it is still never good seeing them. It’s tough to operate a business with the doors shut.

Net Loss of $74M. I know we see big numbers all the time, and it is all relative, I mean that’s probably equivalent to about 3 average Sydney houses.

Debt waivers were established late last year, but this also meant they have seen the debt load increase to over 5x to $1.2B.

It’s not all bad, they have made some divestments, Treasury Brisbane and a jet raising ~$228M and are looking at more in alignment with the strategy of removing non-core and/or low-yield assets. The big capital expenditures are now mostly complete. Let’s not fool ourselves though, these places always need to be refreshed to stay competitive.

The Queens Wharf property in Brisbane remains on track with the opening in 2023. Probably fortuitous timing.

Past reopenings have seen revenue rapidly ramp up and I’m betting, pun intended, that things get back on track now that borders and restrictions are disappearing. 

“The Star Entertainment Group disguised $900 million worth of Chinese debit card gambling transactions as hotel expenses and then lied to banks in an attempt to conceal the massive fraud.” Is the opening paragraph in an article in the SMH earlier this week.

Star is at the start of public hearings following NSW Independent Liquor & Gaming Authority launched the review late last year to assess whether The Star is fit to hold its licence.

This has a very Crown-esq feel to it with the CFO, Harry Theodore, and general counsel, Oliver White, both allegedly involved in misleading NAB and China UnionPay about transactions.

Star accepted payments from UnionPay bank cards at hotels attached to its Sydney, Brisbane, and Gold Coast casinos, and then transferred the money to patrons’ gambling accounts. The inquiry has been told ~$900 million was fed though UnionPay, breached the NAB banking terms, and potentially facilitated skirting China capital.

In 2018, Star engaged KPMG to provide information to the board’s audit committee. The reports showed Star was failing to combat the risk of money-laundering, terrorism financing and corruption at its Sydney and Queensland casinos.​ Star has previously claimed they had actioned all the recommendations. Shareholders will be hoping this is true.

Shares have been largely unchanged with the start of the inquiry and related media reports. Makes me think it must be largely priced in, assuming the inquiry outcome is they can retain all their licences – and in particular, retain them without having to make expensive operational changes. 

A popular advisory service has changed their recommendation on The Star Entertainment Group from BUY to HOLD and removed the price guide. When I’ve seen this call made in the past, it is often followed by a SELL.

I don’t invest in companies that profit from gambling and I wouldn’t support any business that profits from “engaging in a litany of unethical practices, such as the disguise of gambling transactions as hotel expenses, evading taxes, misleading investors, and having a ‘cavalier’ approach to risk and anti-money laundering regulations”.

AVOID!