Star’s nightmare is far from over

But pressure on profitability is mounting.

Operating costs rose 14 percent in fiscal 2022 to $909 million, but increased toward the end of the year, reaching $268 million in the June quarter thanks to higher wages and compliance and risk management costs in particular. Taller.

The money the Star has invested in defending itself in the NSW investigation will vanish in FY2023, but with a new Queensland investigation set to begin public hearings on Tuesday, led by the former Queensland High Court Justice , Robert Gotterson, legal costs aren’t exactly going to anything.

New cost base

More than that, however, compliance costs are here to stay.

The head of the NSW investigation, Adam Bell, SC, will deliver his report to the state casino regulator later this month. Bell’s recommendations will require Star to continue to invest in improvements to its systems and processes, and Star may even need to fund the work of an independent monitor, as was done with Crown in Victoria.

Star’s new chairman, Ben Heap, had sensibly tried to preempt Bell’s recommendations, rebuilding the group’s executive team, compliance function and board, and even appointing the Allen law firm & Overy as an independent monitor to oversee the group’s remediation work.

Heap describes this as a “no regrets” move; While he emphasizes that Star isn’t trying to preempt Bell’s findings, he does say that the monitor is an example of the work that Star wants to do, regardless of where the investigation lands.

Star will eventually publish a detailed list of its remediation priorities, allowing regulators, investors and the public to track its progress. But Heap says it’s more appropriate to do this after the NSW and Queensland investigations are complete.

But again, all of this costs money, and Star says the elevated costs in the June quarter represent the company’s new cost base. But with so many moving parts, investors will likely wait and see if the cost base has really settled.

Unsurprisingly, Heap insists the company is cleaning up its operations and reputation, and remains fit to run its flagship Sydney casino.

He said on Monday that his priority was transparency. “Our approach is to make sure that we are showing… that we are making the necessary changes to ensure that we are protecting our eligibility and therefore licenses.”

Crown was ultimately saved by an acquisition. Is there a similar rescue waiting in Star’s wings?

But Star knows the risks to its Sydney casino are rising, and it is telling that it has cut $162.5 million, or 16 per cent, from Star Sydney’s goodwill value, to reflect both regulatory pressures on the business as the doubts about the return. of Chinese tourists who have long been a key source of income.

Heap has not seen a similar deterioration at the group’s Queensland casinos, but acknowledges the board is aware of the possibility of this happening.

If the recent history of casino investigations in this country is any guide, Gotterson will reopen old wounds and cause some new ones; Star may also find itself fighting to retain its Brisbane and Gold Coast licences.

Sometimes companies like to set aside non-cash impairments, and Star Sydney’s goodwill write-down won’t directly affect investors.

But it is symbolic, as it shows that the reputational damage Star has suffered has eroded the value of the business for reasons that are completely within the company’s control.

The deterioration also demonstrates the heightened uncertainty facing Star Sydney, which now faces direct competition from Crown’s casino, which finally opened a few weeks ago.

Star says the impact has been limited so far, and he’s hopeful that the investments in facilities and loyalty programs he’s made in recent years will pay off.

The fact that Crown cannot operate poker machines under its licenses should provide an additional bulwark against the competition.

But Crown’s growth is just another challenge facing Star in the coming year.

His regulatory and enforcement burden will continue to grow as the NSW and Queensland investigations progress. Then there is the challenge of implementing cashless games (card based games) in Sydney.

Crown was ultimately saved by an acquisition. Is there a similar rescue waiting in Star’s wings?

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