Analysts at JP Morgan Securities Australia Ltd have raised doubts about the timing of the disposal by Australian casino developer Crown Resorts Ltd of its remaining share in Melco Resorts and Entertainment Ltd.
“The timing of the Melco Resorts exit is not ideal after earnings upgrades [of the latter firm],” analysts Donald Carducci, Shaun Cousins and Shalin Doshi wrote in a Tuesday note.
They highlighted that Melco Resorts’ first-quarter performance had been “stronger than expected” by most analysts, “resulting in higher-than-forecast margins, strong rolling chip revenue and respectable mass [market] performance”.
Nasdaq-listed Asia casino developer and operator Melco Resorts – which owns and operates casino properties in Macau and in the Philippines –announced first-quarter 2017 net profit of US$113.4 million, compared to US$39.8 million in the first quarter of 2016.
Crown Resorts’ disposal of its remaining stake in Melco Resorts was announced on Monday. Crown Resorts later stated it planned to use the proceeds from the sale to reduce the company’s debt. Crown Resorts’ net debt position at the end of 2016 was AUD1.77 billion (US$1.30 billion), excluding working capital cash of AUD166.9 million, according to the firm’s latest financial report.
The JP Morgan analysts agreed that the net proceeds from selling Crown Resorts’ remaining stake in Melco Resorts – estimated at AUD1.34 billion – would help the firm to ease balance sheet pressure. But they added: “[The] dollar value of dividends [from Melco Resorts is] greater than dollar value of debt reduction and a short-term negative.”
They further stated: “Based on Melco Resorts’ forecasts, we believe the reduction in gearing is less favourable than maintaining Melco Resorts exposure, although capital expenditure is now better funded.”
Also commenting on the exit of Crown Resorts from Melco Resorts, Aegis Capital Corp analyst David Bain said it eliminated “an ongoing overhang of larger staggered sale transactions by Crown Resorts”.
At the start of May 2016, Crown Resorts – alongside Melco International Development Ltd, controlled by casino entrepreneur Lawrence Ho Yau Lung – each held a stake of 34.3 percent in the joint venture. But in early May 2016, Crown Resorts, controlled by James Packer, said it was cutting its holding in the firm to 27.4 percent. Further sell downs by Crown Resorts occurred in December, ultimately reducing its holding to 11.2 percent.
Following the exit of Crown Resorts from Melco Resorts, an existing agreement between Melco International and Crown Resorts for the establishment of a joint venture to bid for a casino licence in Japan, will also be terminated. Mr Bain noted that this was a positive development for Melco Resorts’ shareholders. He added: “We note our contacts suggest Melco Resorts has made significant headway with a very significant potential partner based in Japan.”
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DS Kim, Amanda Cheng and Livy Lyu
Analysts at brokerage JP Morgan Securities (Asia Pacific)