Banking group Morgan Stanley says that if Philippines-based Bloomberry Resorts Corp were to make a successful bid to own the land on which its Solaire Resort and Casino (pictured) stands it “may drive valuation premium” for that firm.
State-run casino operator and regulator the Philippine Amusement and Gaming Corp (Pagcor) announced last week it was launching an auction to sell two parcels of land in the country’s capital Manila that are occupied by Solaire.
The minimum bid price for the combined plots is PHP37.23 billion (US$726.6 million), to be paid in cash, according to the auction announcement by Pagcor. Bloomberry is however entitled to match the highest complying bid for the two plots and the auction announcement says that Solaire’s lease agreement is in force up to July 2033 and “is extendible for another term under certain conditions”.
Morgan Stanley said that if Bloomberry buys the land where Solaire is located, “the market may put some valuation premium for owning the land, which has appreciated in value (rose by 6 to 7 times in the last five years or so)”.
“The purchase may put Bloomberry’s valuation comparable to peers who own their land … also given that we expect Bloomberry to begin regular dividends in 2018, and Quezon City and Solaire Phase 2 to drive long-term growth,” wrote analysts Alex Poon Praveen Choudhary in a Sunday note. Bloomberry plans to build a casino resort at Quezon City, north of Metro Manila, with construction scheduled to start next year.
The investment bank however cautioned that if Bloomberry acquires the Manila land at the minimum bidding price that “would increase [the firm’s] net debt by PHP37 billion from PHP8.3 billion at end of third quarter 2017, and push up EV/EBITDA [enterprise value/earnings before interest, taxation, depreciation and amortisation] multiple by 2.6 times to 10 times (2018 estimate)”.
The deal could also “reduce return on invested capital to 15 percent from 24 percent” and reduce the expected 2018 dividend, said the Morgan Stanley team. The analysts stated additionally that buying the land at the minimum price of PHP37 billion could “raise [Bloomberry’s] interest expenses by [circa] PHP900 million if we assume half of the consideration to be debt funded at 5 percent, resulting in net reduction on net income and free cash flow to equity by [about] PHP700 million or 6 percent to 8 percent”.
Bloomberry reported net profit of approximately PHP1.86 billion for the three months ended September 30, the company said earlier this week. Profit was up 31.3 percent in year-on-year terms. The strong increase in third-quarter profit was mainly due to operations at Solaire, where net income increased by 45.9 percent compared to the prior-year period to PHP1.96 billion.
