The Star predicts up to $1.6b impairment for NSW business post-Bell Review

The Star predicts up to $1.6b impairment for NSW business post-Bell Review

The Star Sydney's Grand Foyer (via The Star).

Costs associated with the fallout from the Bell Review of The Star’s (ASX: SGR) New South Wales casino licence could result in the company copping a $1.6 billion impairment charge according to the group’s trading update for 1H23.

Announced today, The Star says the impact of operational changes implemented following the Bell Review, amendments to the NSW Casino Control Act, and the potential for an increase in NSW casino duty rates could lead to a non-cash impairment in the range of $400 million to $1.6 billion.

The high end of the range is based on the implementation of NSW casino duty rate increases as proposed by the state government in December last year, with the low end assuming no change in those rates.

The announcement comes alongside The Star releasing its 1H23 earnings update, which detailed revenue rising from its Brisbane and Gold Coast operations, but declining returns from its Sydney casino.

This is the result of a ‘more challenging’ operating environment in Sydney, leading to NSW revenue dropping by 13.5 per cent on pre-COVID levels.

Though revenue was up 30 per cent on pre-COVID levels at the Gold Coast casino - which achieved its highest revenue result on record - and up 9 per cent in Brisbane, overall group revenue was down 1 per cent on pre-COVID levels.

“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,” The Star said.

“This saw a number of excluded patrons and a reduced level of complimentary services and benefits in private gaming areas.

“The Star has also been impacted by increased competition since the opening of Crown Sydney in August 2022.”

Following regulatory scrutiny, The Star said it continued to invest in improved compliance capabilities and incurred remediation costs of approximately $20 million in 1H23.

Subject to the completion of the auditor review process and the finalisation of financial statements for 1H23, The Star expects to report earnings of $195-$205 million in the half - however, this excludes provisions for fines and one-off legal costs which will be treated as significant items when the company provides its audited 1H23 results.

Based on current trading performance and the outlook for the remainder of the second half, The Star says it expected to report earnings of between $330 million to $360 million for the full year.

This estimation includes expected remediation costs of $35 million to $45 million, of which approximately 50 per cent are expected to be recurring from FY24.

“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 behaviour,” The Star said.

“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 around $40 million to the company’s operating performance and include replacing contractor ‘surge’ resourcing with full time resources, uplifting the Sydney casino’s performance and enhancing the customer experience there.

The Star CEO and managing director Robbie Cook, who was appointed just before the latest financial year commenced, said he was pleased about the performance of the company’s Queensland-based properties but acknowledged the Sydney casino was impacted by a number of challenges.

“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,” Cook said.

“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.”

The announcement comes nearly a week after The Star was hit with two more shareholder class actions over allegedly misleading representations about anti-money laundering and counter-terrorism financing (AML/CTF) obligations.

Law firms Phi Finney McDonald and Shine Lawyers (ASX: SHJ) are behind the two latest class actions, adding to two ‘substantially similar’ legal actions launched against The Star by Slater & Gordon in March 2022 and by Maurice Blackburn in November.

As with the Slater & Gordon and the Maurice Blackburn class actions, The Star said it would defend both law suits, which were filed in the Supreme Court of Victoria. 

Shares in The Star are down 21.07 per cent to $1.48 per share at 12.27pm AEDT.

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