From AFR

Star Entertainment in a spin as regulator goes after new brigade

The casino operator’s time in the sin-bin is just getting started. It faces a long road back.

There are two critical stakeholders when you run a big casino group: the government and the regulator. There are no tables, no pokies, no beer and skittles or profit for shareholders without their blessing.

The Star Entertainment Group, even with a new-look board and what was supposed to be a cleanskin CEO, is consistently and astoundingly blindsided by both, particularly in its bigger market, Sydney.

Star Entertainment boss Robbie Cooke has leapt from one problem to the next in his less than 18 months in the top job. A second Bell inquiry is the last thing he needed. David Rowe

The blindsiding has got to the point where investors cannot afford to listen when their board and CEO – all supposedly working to atone for the sins of the past – tell them everything is going to be OK.

Because the way the government and regulator see it, everything is not OK. Star’s licence in NSW is suspended, and it worries the casinos owner may not have learnt its lessons.

And when you’re already in the corporate sin bin, have nearly gone broke twice in the past year and are trying to remediate your way out, the regulator’s view is what matters. Particularly for investors. Star’s shares are about to be hit hard, again.

This week’s blindsiding comes from the NSW’s casinos regulator, which launched a second major inquiry into Star’s Sydney gaming operations on Monday morning.

Having already deemed Star unfit to hold its casino licence in 2022 and appointed a manager to oversee The Star Sydney, the regulator is worried that Star’s remediation may not be on track.

It wants to test Star’s commitment to restoring its stability and earning back trust – things CEO Robbie Cooke and his team like to promise they are doing when they talk to investors – and the overall cultural transformation.

So the regulator started a new 15-week investigation by the same Sydney barrister who tore the company’s credibility to shreds, Adam Bell, on Monday morning.

And when did Star find out about it? Also Monday morning.

Star knew nothing of a major review by the same regulator it explicitly warned shareholders has the right to force it to divest its Sydney casino if it is deemed unfit to hold a licence. Star immediately halted trading in its shares and could be off the boards for two days.

How can you be so surprised by such an important review? And how can the regulator – which oversees NSW’s two casinos – keep it such a secret?

Clearly, things are not great between the new-look and keen-to-remediate Star and its big stakeholder.

NSW Independent Casino Commission chief Philip Crawford wants another look under The Star Sydney’s bonnet. Rhett Wyman

The regulator says it is important that the review is done now; its manager is appointed to oversee The Star Sydney until June 30 and needs to know whether Star has learnt the required lessons and implemented changes.

While Star was surprised, the more shocking thing is that its investors were not.

Investors have seen this before – barely a year ago, then NSW treasurer Matt Kean pulled a proposed tax increase from nowhere. Star was shocked and angry and, yes, it ended up cutting a new deal with a new government, but these sorts of surprises show it has quickly become a punching bag and make you question how much social licence it has left in its biggest market, NSW.

In investment markets, that credibility has already been crunched. It finished last year with three times as many shares on issue after going to shareholders for two equity bailouts, and it will be a long time before the company makes anywhere close to 20¢ a share for investors like it did in FY18 and FY19.

The question is: What exactly is the Independent Casino Commission in NSW, the fired-up regulator, looking for?

Big test for CEO

The terms of reference, released on Monday morning, include Star’s risk-management culture, financial stability, management and reporting lines, and its compliance with internal controls. That sounds like it wants to comb through Star management teams and weed out anyone not on board with the remediation efforts.

The one good bit of news for Star and its under-the-gun management team and board is that the inquiry’s hearings are scheduled to take place in private. If there is a painful skewering, it will happen behind closed doors.

It is a big test for CEO Cooke, the former Tatts Group and Tyro Payments executive, who has had an event-filled 1½ years in charge of the casino owner. He has battled dwindling earnings, a softening economic environment, solvency threats (twice), and intense government and regulatory scrutiny, which has made the remediation much harder than expected.

Cooke has responded by cutting costs, slashing jobs, raising equity (twice), refinancing debt and has tried to repair those stakeholder relations, only to keep stumbling upon another problem.

He has had to juggle the NSW tax issue with regulatory oversight in NSW and Queensland, construction at its new casino in Brisbane and Star’s earnings and financial position.

Has he had the priorities in the right order? Bell’s second inquiry will be telling.

The whole affair serves as another reminder that the Star-style remediation and clean-up jobs can be much easier in private hands. Regulatory reviews, surprises and earnings downgrades seem to matter less when you are a private equity investment in a wider portfolio, valued quarterly or semi-annually and there is no need for embarrassing trading halts.

The matter is sure to put a fire under Star’s upcoming meetings with investors and analysts, which start with the group’s half-year results on Wednesday. They’ve been warned that after a suspended licence in NSW could come something more severe, such as cancelling the licence and forcing a sale.

Star has not provided earnings guidance for the 2024 financial year, but it is not expected to be a cracker. Analysts reckon it will report $1.75 billion revenue and $273 million EBITDA for the year to June 30, down from $1.87 billion and $317 million last year, according to S&P Global Markets Research consensus numbers.