Consumer cyclical

Will Star be deemed ‘too important’ to Sydney’s economy to cease operating?

By Market Index
Fri 16 Sep 22, 12:00pm (AEST)
Source: Unsplash

Key Points

  • The Bell inquiry concluded that Star was unfit to hold a casino licence
  • Macquarie’s Outperform rating and $3.50 target remain unchanged
  • Star has two weeks to explain why it should be allowed to continue operating

Investors could be forgiven for scratching their heads wondering if Star Entertainment (ASX: SGR) is any worse off following recent rulings that it is unsuitable to hold a NSW casino licence.

While there appears to be no clear pathway on how Star can achieve that suitability, Macquarie’s Outperform rating and $3.50 target remain unchanged.

For those that have overlooked recent developments, Macquarie decided not to downgrade Star, despite a Bell inquiry which concluded within its 907-page findings that the Star Sydney – which comprises 54% of group earnings - had engaged in a laundry-list of deceptive and unethical practices.

The Bell inquiry concluded that the company was unfit to hold a casino licence after misleading banks and investors, evading taxes, lacking controls and compliance with anti-money laundering regulations.

In an attempt to soften the market’s reaction, Star entered into a trading halt on Monday before the regulator’s ‘unsuitable to hold a licence’ decision was announced.

What happens next?

The casino regulator will only decide what it wants to do next, after Star responds to the notice over the next two weeks, presumably with reasons why it should be allowed to continue operating.

While disciplinary action is expected to be compliance focused rather than punitive, there’s no absolute certainty that loss of licence will eventuate.

The $64,000 question is whether Star will be able to keep its doors open due to the size of the company’s contribution to the NSW economy.

The disciplinary action currently being considered includes:

  • Cancellation or suspension of license

  • Imposition of a pecuniary penalty of up to $100m

  • Amendment of the terms and conditions of license or requirement that the operator maybe refrained from doing certain things

  • Issue of a letter of censure to the casino operator

Is Star too big to fail?

With so many different interests to be considered, Geoffrey Watson, a director at the Centre for Public Integrity compared Star to the “too big to fail” argument in favour of bank bailouts during the global financial crisis.

“The conclusion and closing of licence would affect so many people who are innocent of any wrongdoing like frontline employees and shareholders,” Watson noted.

However, investors should remember that NSW regulators proved they weren’t completely toothless when they banned Crown (ASX: CWN) from opening its new waterfront casino in Barangaroo for 16 months.

Crown recently received a provisional permit to open with a monitor similar to the ones mandated in Victoria and WA, and Star may end up receiving similar treatment.

Arrogant and closed off

In a letter to shareholders, interim chairman Ben Heap reassured the market that the arrogance and indifference to criticism displayed by management in the past will not continue.

Heap also reassured shareholders that management is developing a comprehensive remediation plan to serve as an integrated roadmap for improving governance, culture and controls.

Star is expected to make stronger efforts to change processes and compliance checks, restrict cash on the gambling floor, limit the effects of problem gambling by putting time limits on pokies.

Heap’s letter appears to have curried market favour with the share price up around 3% at the close yesterday, and up 3% at noon today.

Heap’s letter to the market yesterday follows Star reassurances to the Bell inquiry that a significant reform agenda was already under way following the departure of key executives and major board restructuring.

Star Entertainment share price over 12 months.


What brokers think

Star’s share price is down -35% over the past 12 months.

Consensus on Star is Moderate Buy.

Based on Morningstar’s fair value of $3.64 the stock appears to be undervalued.


Goldman Sachs is Neutral rated on Star and believes the significant ongoing risks on the name outweigh the upside in terms of valuation.

The broker’s blended 12-month target price is $3.48. 

Based on the five brokers that cover Star (as reported on by FN Arena) the stock is currently trading with 23.6% upside to the target price of $3.41.

Morgans retains a Hold rating on concerns over regulatory investigations and potential delays for the sale and leaseback of The Star Sydney buildings.

The broker’s price target is lowered to $3.00 from $3.10 to incorporate a lower sales forecast and lower margin assumptions.

Intelligent Investor suspects Star will be deemed too important to Sydney’s economy as a cash machine and employer to cease operating.

Assuming the licence isn’t revoked, the fund manager believes Star is capable of generating at least $200m of free cash flow annually once its Queens Wharf project is completed mid-next year.

The fund manager rates Star a Buy, and notes even if the casino were to close, there’s at least $2.00 per share of value in the company’s sprawling property portfolio and non-gaming operations, which offers some downside protection.

Written By

Market Index

Get the latest news and insights direct to your inbox

Subscribe free