'Catastrophic' risk: Why Star shares have lost 25% in 4 days

The outcome of this inquiry could determine whether Star Entertainment hits Blackjack or bust.

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They say time heals all wounds, but the situation has only worsened for Star Entertainment Group Ltd (ASX: SGR) shares over the past four trading sessions.

In afternoon trading, shares in the casino operator are 12.99% lower at 42 cents. For context, the S&P/ASX 200 Index (ASX: XJO) is down 1.76% today. While investors are choosing to sell rather indiscriminately today, Star shares are copping the brunt of it.

Star's share price deterioration is unfolding as the company faces its second inquiry in less than a year.

a sad gambler slumps at a casino table with hands on head and a large pile of casino chips in the foreground.

Image source: Getty Images

Sydney license hanging in the balance

For some background, the independent inquiry is led by Adam Bell SC — aptly named Bell Inquiry II. The New South Wales Independent Casino Commission (NICC) decided to go for round two after not being satisfied with the pace of change in fixing the issues identified during the last inquiry.

Most importantly, the regulator will decide whether Star is suitable to hold a casino license in NSW at the end of the hearing.

Unfortunately, the inquiry is not off to a great start for Star shareholders, putting pressure on Star Shares. The Star Entertainment share price is now down 24.64% over four trading sessions, as depicted in the chart below.

Yesterday, Nick Weeks, acting as a stand-in manager of Star Sydney, delivered his view on recent activities within the company. Weeks accused the Casino of 'bulk approving' high-risk customers and going as far as to falsify documentation.

To take a step further, evidence from yesterday allegedly shows that the now-resigned CEO, Robbie Cooke, plotted with chair David Foster to "get rid of" Nick Weeks. Additional messages between the two drew Weeks to the allegation that Cooke and Foster must have accessed his diary.

These allegations don't bode well for a company trying to demonstrate an improvement in ethical practices.

The inquiry will determine whether Star is fit to hold a casino license. Importantly, it could be a case of 'two strikes and you're out' this time. If the company is deemed unsuitable, it runs the risk of permanently losing the ability to operate, resulting in its Sydney casino being shut down.

Chance of cancellation cuts Star Entertainment shares

Analysts at Ord Minnett still think Star will be able to prove itself suitable in NSW. However, it comes with a worrying caveat — the risk of the Sydney casino being forced to shut is rising.

Ord Minnett reckons it will be a black-or-white decision. Either Star's Sydney operations will close or shut. There's likely no in-between verdict in their view.

Moreover, the broker has described a closure as catastrophic, stating:

A temporary closure would be costly. In this scenario, we estimate a daily EBITDA of $2m, depending on how quickly Star can flex its cost base, notably labour. A complete cancellation of the license could be catastrophic.

The Star Entertainment share price is down 67% compared to a year ago.

Motley Fool contributor Mitchell Lawler has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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