ASX:SGR
Star Entertainment Group Ltd
Investment Summary
The fund managers believe that Star Entertainment Group Ltd (SGR.ASX) is facing significant challenges, particularly with heightened remediation and compliance costs leading to depressed earnings. In their opinion, the recent share price drop of 34% reflects these struggles, along with a weak economy and uncertainties surrounding management's execution on cost reductions. Nevertheless, they identify substantial value in the group’s property assets, with estimated worth ranging from $700m (24cps) to $2.7bn (94cps) based on various valuation methods. The fund managers note that recovery in earnings could suggest a potential valuation of $1bn (35cps) or more if the company overcomes current obstacles. However, they have decided to reduce their position size due to a high risk of default linked to expected cash outflows and uncertainties regarding a $100m debt tranche. Overall, while they see potential upside, the ongoing regulatory risks and early losses at the QWB project have led to poor performance.
Commentary From The Managers
Spheria Asset Management
30 Sept 2024
$0.30
- Star Entertainment Group (SGR.ASX) share price declined by 34% in September after the delayed release of FY24 results.
- There are several critical factors impacting SGR’s earnings outlook, including a weak economy and management’s execution on cost reductions.
- The introduction of carded gaming and the duration of ongoing remediation costs remain significant considerations.
- Current earnings are heavily depressed, mainly due to high remediation and compliance costs, leading to negative EBITDA.
- There is substantial value in the group’s property assets; estimates range from $700m (24 cents per share) based on hotel room values to $2.7bn (94 cents per share) on a replacement cost basis.
- If earnings recover post-remediation, the group could potentially be valued at $1bn (35 cents per share) or more.
- Due to high risks of default from anticipated short-term cash outflows, Spheria Asset Management decided to reduce the position size.
- There are uncertainties surrounding debt tranche 2 ($100m), which is contingent on raising $150m of subordinated debt by December 2024, posing a dilution risk.
- Overall, the investment has notably underperformed due to underestimated regulatory risks and significant early losses at the QWB project.
Spheria Asset Management
30 Sept 2023
$0.62
- Star Entertainment Group (SGR.ASX) share price decreased by 34% in the last month due to a capital raising initiative.
- The company successfully raised $750m to manage higher cost debt and refinance its facilities.
- Spheria Asset Management believes this positions SGR better to handle upcoming liabilities, particularly the AUSTRAC penalty.
- The market is anticipating a potential agreement regarding the AUSTRAC penalty in November.
- Expected penalties may be installment-based, aiming to support manageable cash flows.
- Other significant liabilities are related to the Queens Wharf development, which Spheria views as manageable.
- Long-term prospects for SGR are considered favorable, especially after addressing current distress points.
- Spheria Asset Management continues to hold because distressed phases often present the opportunity for significant returns.
Please note: The completeness, accuracy or current status of the investments referenced are not guaranteed.