Quarterly earnings for Macau gaming operators have become “increasingly difficult to forecast,” says a note issued on Thursday by brokerage Daiwa Securities Group Inc. Reporting season for the second quarter earnings of the Macau casino firms is due to begin shortly.
Daiwa cited a number of reasons why the forecasting of such earnings had become more difficult, including what it termed “a trend of increasing inflation of the ‘adjusted EBITDA’ [earnings before interest, taxation, depreciation and amortisation] figures”.
The institution said this was a result of “a growing amount of operating costs being excluded in the calculation of this non-GAAP [generally-accepted accounting principles] measure,” on behalf of the operators.
In June, the brokerage had issued a report on the Macau gaming sector’s outlook for the second half of 2016 that said – according to its analysis – Macau operators’ calculation of adjusted EBITDA involved exclusion of certain costs, including “cash costs, recurring … [costs], and/or business-related costs”.
“The magnitude of these adjustments (as a percentage of core-EBITDA) has been on an accelerating uptrend, inflating core-EBITDA by close to 20 percent for 2015 (from an average of 7 percent for 2010 to 2014),” said Daiwa analysts Jamie Soo and Adrian Chan in their June report.
“Of note also is that these non-GAAP metrics are defined independently and comparing them to assess relative profitability is not a fair ‘apples-to-apples’ comparison,” added Daiwa’s June analysis.
“We may see even higher [cost] exclusions in second quarter 2016, the quarter which is immediately prior to new property openings in the third quarter (Sands [China Ltd's] Parisian [Macao] and [Wynn Macau Ltd's] Wynn Palace),” noted Mr Soo and Mr Chan at the time.
“As such, there is likely increasing room for surprises between actual and our/consensus estimates,” they added in the June note.
Meanwhile Credit Suisse AG issued a note on Friday questioning the sustainability of dividends issued by the Macau gaming operators.
“Investors’ increased appetite for yield plays like Sands China helps drive the share price higher despite the weak industry fundamentals,” noted analysts Kenneth Fong, Isis Wong and Lok Kan Chan.
“While Sands’ headline 7 percent yield in 2016 appears attractive, we do not think it is sustainable. Apart from factors like gearing, covenant, capex [capital expenditure] needs, and earnings, the renewal of gaming licence[s] complicates debt refinancing exercise[s] for casino companies,” noted the Credit Suisse team, referring to the expiry – on various dates between 2020 and 2022 – of the gaming licences of the six Macau casino operators.
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"The [Macau] government has a lead in this subject in regards to what should be done after the [gaming] concessions expire. We will be first listening to what the government will say”
Ambrose So Shu Fai
Vice-chairman and chief executive at Macau casino operator SJM Holdings