Regulator fines Star $100m and suspends Sydney casino licence

While the anxiously awaited decision on the future of large-cap Star Entertainment Group (ASX: SGR) by NSW casino watchdog brought with it mixed blessing this morning, the casino operator entered a trading halt ahead of the regulator’s verdict to stanch what it expected to be largely negative fallout.

The NSW Independent Casino Commission (NICC) suspended the company’s Sydney casino licence and ordered it to pay a $100m fine – the maximum penalty under new casino regulation laws - but stopped short of closing it down.

The casino is allowed to stay open while it proves why it should be trusted to run its flagship casino.

Today’s trading halt also follows a warning by Star’s auditors at Ernst & Young that the company faced “material uncertainties” due to potential disciplinary action from NICC.

Licence suspended

Effective 9:00am this Friday, October 21, 2022, NICC has appointed Nicholas Weeks as special manager, after concluding it in the public interest for a manager be appointed to run casino business at the Star in Sydney.

The special manager will hold the licence until the NICC can determine whether The Star and its management team is fit to run its operations.

While NSW legislation prescribes for suspension lasting no longer than 90 days, NICC chief commissioner Philip Crawford has hinted that it could in this instance be considerably longer.

Crawford attributes the decision not to revoke company’s Sydney casino licence outright to the letter from Star chair Ben Heap which commits to taking significant and urgent remedial steps" and would do "whatever necessary" to "restore" the casino to suitability.

While Heap acknowledged the gravity of the Bell review findings, he also reminded NICC of what a decision to cancel the licence would have meant for thousands of Star workers.

Details on disciplinary action are expected follow NICC’s announcement this morning.

One-eyed focus on profit

Today’s ruling by NICC on Star’s Sydney casino follows revelations early October that the company was deemed unsuitable to hold licences for its Brisbane and Gold Coast casinos following a damning inquiry report that found it allowed money laundering to flourish with a “one-eyed focus on profit”.

Star was given 21 days in which to respond to a show-cause notice and faces the likely appointment of a government “special manager” to hold the casino licences and oversee the gaming operations as it moves to open the $3.6bn Queen’s Wharf casino resort in Brisbane’s CBD next year.

In 2015 Qld’s Palaszczuk government awarded Star the rights to develop the Queen’s Wharf development in a joint venture with Hong Kong partners Chow Tai Fook and Far East Consortium.

Already accepted by the government, the inquiry report’s 12 recommendations include an overhaul of gaming regulation laws, a doubling of the maximum penalty imposed on a ­casino to $100m and a move to limit cash transactions in casinos to $1000.

What brokers think

Star’s share price is down around -30% over the last 12 months.

Consensus on Star is Moderate Buy.

Based on Morningstar’s fair value of $3.79 the stock appears to be undervalued.

While certainty of outcomes helps to alleviate the valuation pressures on Star, Goldman Sachs notes a lack of clarity on the financial implications of today’s announcement.

The broker is Neutral-rated on Star and has a price target of $2.90.

Based on the five brokers that cover Star (as reported on by FN Arena) the stock is currently trading with 31.2% upside to the target price of $3.41.

Credit Suisse reminds investors that Star is only indirectly exposed to the Qld market, with its exposure estimated at $255m of slot machine revenue in FY25.

The broker is Neutral-rated and retains price target of $2.90.

Star Entertainment Group share price over 12 months.