Star Entertainment warns of major earnings hit, shares crash 22% in response

Star Entertainment Group recently saw a major drop in shares which tumbled 22% to a record low. The drop came after the group issued a warning, predicting a $1.11 billion (A$1.6 billion) impairment charge in first-half earnings from the originally proposed casino duty hike.

The warning is part of a bigger picture as it also underlines the potential impact of proposed tax rate hikes on New South Wales-based casinos. This will further affect the entirety of Australia, as the proceeds are to be redirected to help numerous communities affected by both floods and bushfires throughout the country.

The tax reform already poses major challenges to Star’s Sydney operations’ profitability. It was announced last year in December, and it should come into force in July 2023, according to the current roadmap. The impact on the operations in Sydney will, in turn, impact the entire group, as its Sydney operations make up around half of its revenue, according to 2022 data.

Analysts at Jefferies said that the situation strongly highlights the uncertainty regarding duty rates for Sydney, which can be seen from the A$400 million to A$1.6 billion range for the non-cash impairment charge to the NSW-based casino. As for Star, it said that, if the state proposal moves ahead, it intends to conduct an urgent review of its operating model and assets, with a focus on its Sydney business.

The situation led to a significant share crash for the country’s second-largest casino. The shares have gone down by 21.9%, hitting an all-time low by dropping to only A$1.46. At the time of writing, the price had increased slightly to A$1.48, while the broader market was slightly weaker.

The broad impact of tax reform proposal

The mentioned tax reform proposal plays a much larger role for New South Wales than just its impact on Star Entertainment Group. In fact, it was said that it plays the central role for the state’s upcoming elections, scheduled to take place on March 25th this year.

The conservative government of NSW also intends to phase in mandatory cashless poker machines over the course of the next five years. Apparently, the government believes that this could help resolve the problems of gambling and money laundering. Meanwhile, the center-left Labor opposition has its own plans, intending to run a limited trial of the cashless machines only instead of fully replacing the old ones.

Meanwhile, Star shared that it would incur remediation cost that sits at around A$20 million in six months that ended on December 31st. The company attempted to return to license stability by improving its compliance processes.

The company also saw a drop in earnings due to a number of government probes, three class actions, and COVID-19 curbs. The combination led to a significant net loss last August, and 2022 has seen the value of the casino shares get cut in half.