Crown (ASX: CWN) will likely push ahead, albeit at a slower pace, with its planned new $2.2 billion casino on the Barangaroo foreshore despite the Bergin inquiry’s determination that the casino giant is "not suitable" to hold a gaming licence, says Morningstar.

In a research note, equity analyst Angus Hewitt said the report was damning, but not unexpected. He expects Crown will follow the Commissioner's recommendations to become a "suitable person" to hold a licence. However, he says a likely regulator crackdown of casinos could slow the recovery of Crown's VIP gaming in Australia. Border closures and social distancing measures also continue to weigh.

"We expect Crown Sydney will take steps to address these recommendations, and continue to forecast the casino eventually opening and contributing around 15 per cent of consolidated earnings by fiscal 2025," Hewitt says.

"However, a protracted impact on the high roller business stemming from tighter regulation and continued border restrictions beyond our already muted expectations presents further downside risk—the VIP businesses in Crown's three Australian properties collectively represent around a quarter of our fair value estimate.

"We forecast VIP turnover returning to fiscal 2019 levels by fiscal 2025 and anticipate Australian VIP gaming revenue in fiscal 2021 to be virtually non-existent."

While the report found the transaction between the company’s 37 per cent shareholder and former executive chairman James Packer's Consolidated Press Holdings, or CPH, and Melco/KittyHawk did not constitute a breach of the Barangaroo restricted gaming licence, Commissioner Bergin highlighted numerous failings at the casino and determined Crown at present is unsuitable to operate Sydney's second casino. Money laundering was allowed through subsidiaries' bank accounts and Crown failed to act when notified. Recommendations were made for Crown to become a "suitable person".

Three directors have resigned since the release of the report. Among them is John Poynton, who represented James Packer's Consolidated Press Holdings. Crown chief executive Ken Barton is also said to be on his way out the door. However, Crown released a statement on Friday saying this was false. 

Crown shares were in a trading halt prior to the report. Shares closed lower by 3.35 per cent to $9.81 on Wednesday.

ASX-listed Resorts & Casinos, Price Movement YTD

Crown Resorts (CWN), SkyCity Entertainment Group (SKC), The Star Entertainment Group (SGR), Morningstar Australia Index PR (MSAUAUDP)

Source: Morningstar Premium

Hewitt is maintaining his $10.70 fair value estimate for narrow-moat Crown. At yesterday's close, CWN was trading at three stars, or fairly valued. However, Hewitt says several unknowns remain for investors including the response to the report of the NSW Independent Liquor and Gaming Authority, subsequent tightening regulations, and how the casino market will respond to ongoing covid complications. The Victorian Commission for Gambling and Liquor Regulation is also reviewing Crown's suitability to hold Victoria's sole casino licence.

Long-term, Hewitt notes that Crown has already taken steps to address its shortcomings, including establishing a compliance and financial crimes department (independent of business unit), undergoing board renewal, and terminating the "Controlling Shareholder Protocol" that enabled sharing confidential information with major shareholder CPH and James Packer.

"A line in the inqury report jumped out at me: It must also be recognised that Crown has been working very hard to convert itself into a person that the Authority would regard as “suitable” to be a close associate of the Licensee," Hewitt says.

Hewitt anticipates a focus on junket operators will result in local regulation or even an outright ban; the report recommended the latter in NSW, though Commissioner Bergin's recommendations are yet to be officially adopted by the NSW Independent Liquor and Gaming Authority. Australia's anti-money laundering watchdog says these operators, who bring wealthy Asian gamblers to Australian casinos, have been exploited by criminals and foreign agents. Crown already ceased dealings with junket operators unless individual operators are licensed (or otherwise approved) by state gaming regulators.

"In our opinion, Crown's VIP business doesn't need to rely wholly on junket-driven activity, and the recommendations support our unchanged forecast for a slower recovery of VIP gaming in Australia compared with markets such as Macao," Hewitt says.

The NSW Independent Liquor and Gaming Authority will now consider the inquiry's recommendations and decide which changes Crown must make before gaming can begin.

Crown is due to report its half year results on 18 February.