The majority of the Macau casino operators is unlikely to resume dividend payment in the near term, suggested JP Morgan Securities (Asia Pacific) Ltd analyst DS Kim in an interview with GGRAsia. Despite posting strong revenue growth in the first quarter, Macau names are likely to wait for further improvement in their respective leverage ratios, earnings, and cash flows, before mulling resumption of their dividend programmes, he added.
“I am cautiously optimistic that cash rich companies may resume dividend for fiscal year 2023 to be paid in 2024”, he said. “But if we get lucky, they may resume with the interim one that is going to be paid or is going to be announced in August 2023. But I would assign higher likelihood on the final [2023 dividend]”.
He added: “For those operators with net debt, given their current leverage, in our view, would need to manage their balance sheet before thinking about returning capital [to investors].”
Mr Kim, the head of Asia gaming and leisure research at JP Morgan, pointed out that the Macau casino operators had been experiencing a “snapback” recovery in terms of gaming demand, following the easing in January of Covid-19-related travel restrictions in Macau, mainland China and Hong Kong. However, most of these firms were still on a net debt position, which weighted on their decision to resume dividend payments.
“Operators may want to remain prudent in not appearing to reward shareholders too early, so they may want to focus on their balance sheet,” he said.
“The only driver for the EBITDA [earnings before interest, taxation, depreciation and amortisation] recovery is gaming demand recovery, which is ‘so far, so great’; recovery has been fantastic. But in terms of before paying a dividend, [the Macau gaming operators] need to look at how far they have recovered versus 2019 level. That’s the first consideration,” Mr Kim told GGRAsia.
Another consideration was the operators’ debt-to-EBITDA ratio as a measure of financial leverage. Most of the Macau operators – except Galaxy Entertainment Group Ltd – are “running balance sheet on a trailing 12-month perspective (TTM) that looks very bad,” the analyst explained.
“Except last quarter, they were making huge losses. Banks look at TTM leverage ratio, that is, they need to wait at least three, four quarters to make sense of the leverage ratio… Then, after that, it is up to the management to see where they feel most comfortable with the leverage ratio.”
Mr Kim said that “two to three times of net debt-to-EBITDA” would be considered a comfortable level to restart dividend payment. “Maybe four times is okay, but two to three times is more prudent management,” he added.
Macau casino-sector dividend programmes were curtailed during the Covid-19 pandemic, amid tighter trading conditions. One of the local operators, Sands China Ltd, affirmed recently it has conditions from lenders concerning its ability to issue dividends. They relate to permitted consolidated leverage ratio, and could still be applicable up to the start of 2025.
U.S.-based casino operator Wynn Resorts Ltd – the parent of Wynn Macau Ltd – announced earlier this month the resumption of its quarterly dividend programme, with a cash dividend of US$0.25 per share, payable on June 6 to stockholders of record as of May 23. “The reinstatement of our dividend programme reflects the strength of our financial results, our robust liquidity position and our commitment to returning capital to shareholders,” it stated at the time.
Mr Kim also commented on the recent sell-off of Macau names, despite the improving trading situation in the local casino market.
“Based on our understanding, a lot of global ‘long’ investors are seemingly reducing exposure to China consumption stocks, in part because of seemingly deteriorating macro, and spending power concern on the China macro front; and in part because of risk management,” said Mr Kim. “So the investor sentiment on China investment seems soft at the moment.”
He added: “And Macau [names], historically having been owned by more foreigners than mainland [China] investors, seemingly are also affected.”
JP Morgan maintains its bullish call on the Macau gaming industry, the analyst stressed.
“The good thing is that the Macau stocks look a little too cheap and the [recovery] momentum, fundamentals, cash flow, everything looks much better, versus any other time in the past three or four years. We cannot believe that the multiples, the valuation will stay at current level forever. So, especially for the quality blue chip names, we want to use this as an opportunity to build long positions,” the JP Morgan analyst said.
