The companies that live or die with the stroke of a regulatory pen


March 17, 2021
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Deep in any corporate vault lies a piece of paper or two that affirms the right of an enterprise to operate, such as articles of incorporation, a banking or broadcasting licence or a mining permit.

Apart from diligent company secretaries, no-one else will give the paperwork a second thought. But when this right to operate is threatened, the anxiety level quickly rises.

Nothing exemplifies the dangers more than the stricken Crown Resorts (CWN), which faces a crucial NSW decision on whether it should hold the right to operate Sydney’s second casino. The Independent Liquor and Gaming Authority has deemed the Packer-linked entity to be not suitable, but it’s up to Macquarie Street to decide.

 Crown also faces no fewer than two royal commissions, in Victoria and Western Australia.

A couple of months back, it was inconceivable that Crown even the remote danger of losing its franchise, even though allegations of money laundering at its money bins had been gaining traction.

And while the Hayne royal commission was tough on the banks, there was never any question their right to operate would be curtailed.

But the lesson from Crown is don’t take the hand that signed the paper for granted. Australian miners operating abroad will heed this already, having been chucked out of jurisdictions including Indonesia and Thailand.

So too will the listed salary packaging and novated lease operators, whose business models are based on a FBT concession for motor vehicles and not-for-profit organisations that Kevin Rudd sought to abolish.

The threat passed after the Coalition won government and it’s not a policy path Labor will revisit in a hurry. The key listed operators in the sector (to varying degrees) are McMillan Shakespeare (MMS) Smartgroup (SIQ), Eclipx Group (ECX) and SG Fleet (SGF).

Meanwhile, Crown shares have held up remarkably well despite the regulatory travails and the coronavirus, down only 15 per cent on just before the latter struck in mid February last year.

They’re also up 22 per cent since early November last year – just before the regulatory woes started to bite – which suggests that investors are not convinced the NSW and/or Victorian governments will pull the pin.

One reason for not withdrawing Crown’s licences is because the company is able to demonstrate that it has addressed the sins of a past under a totally revamped board and management.

After all, if an axe has a new handle and a head, is it the same axe?

Crown’s $6.7 billion valuation is also underpinned by conservative gearing and $5.1 billion of property plant and equipment, notably the snazzy Southbank turf in Melbourne, as well as Barangaroo.

At its half year results the company revealed the sale of apartments at Barangaroo was likely to reap $1.1 billion, compared with market expectations of around $800 million.

Crown’s patronage update was also better than expected, with visits to its mainstay Melbourne casino down 26 per cent in the month of January. Given the Covid restrictions that staunched holiday traffic, this figure could have been much worse.

Within the Perth bubble, visitations to Burswood rose 8 per cent.

While Crown is under the spotlight, enhanced regulatory risk is also a key concern for incumbent Sydney casino operator Star Entertainment (SGR). Sky City Entertainment (SKC) runs the casino in Auckland – its flagship asset – but also has casinos in Wellington, Hamilton and Adelaide.

Star shares have gained about 18 per cent over the last year, while Skycity shares marked time. At the very least, these companies face increased costs to cope with the extra scrutiny over money laundering concerns, while the lucrative Chinese ‘junket’ channels are a thing of the past even when normal travel returns.

An alternative exposure is the $60 million market cap minnow Aquis Entertainment (AQS), which operates the Canberra money bin (no – not Parliament House) and is using the facility as an exemplar to develop and manage “quality destination integrated resorts in underserved areas of Australia.”

Birdsville and Bourke – your casinos await.

Meanwhile, the listed aged care stocks face regulatory upheaval following the release of the aged care Royal Commission’s findings – or do they?  

The report sheets the blame home to both government and the industry, noting “poor quality on the part of some aged care providers and fundamental systems flaws with the way the Australian aged care system is designed and governed.”

While the report contains 146 recommendations and is preceded by strong language, most of the proposal boil down to bureaucratic tinkering or motherhood stuff about the need for better trained staff.

The key stocks in the sector – Japara (JHC), Regis Healthcare (REG) and Estia (EHE) – have yet to make any official disclosures on the likely impacts. But with the government pouring at least half a billion extra into the sector – probably much more in the longer term – the providers could well emerge unscathed, or as winners.

Investors in these stocks don’t seem all that worried about the prospect of seismic reforms.

The broader lesson for investors is that is whether the government grants the right to run a nursing home, casino, a rubbish dump or a TV station, don’t take the hand that signs the paper for granted.

Having said that, there are clear and present opportunities for investors willing to punt on the status quo remaining after the dust has settled on the voluminous royal commission findings.

After all the huffing and puffing did the Hayne commission really seriously crimp the banks’ ongoing profitability?

Tim Boreham edits The New Criteriontim@independentresearch.com.au