GGRAsia – Fitch upgrades SJM outlook, EBITDA likely to double

Fitch upgrades SJM outlook, EBITDA likely to double

Jan 04, 2024 Newsdesk Latest News, Macau, Top of the deck

Fitch Ratings Inc forecasts SJM Holdings Ltd’s earnings before interest, taxation, depreciation and amortisation (EBITDA) to reach HKD3.6 billion (US$461.1 million) this year, up from an estimated HKD1.7 billion in 2023.

For 2025 and 2026, the Macau casino operator’s EBITDA is expected to grow to respectively HKD5.2 billion and HKD6.6 billion, while its EBITDA leverage is expected to decline to 5.3 times in 2025 and 3.7 times in 2026, stated the ratings agency.

In a Thursday report, Fitch said it had revised the outlook on SJM Holdings’ long-term foreign-currency issuer default rating to “stable” from “negative”, and affirmed the firm’s rating at ‘BB-’.

The stable outlook “reflects the robust recovery” in the number of visitor arrivals and gaming revenue in Macau, “despite the economic downturn in China,” said the institution.

Hong Kong-listed SJM Holdings is the holding company of SJM Resorts Ltd, one of six casino concessionaires in Macau. The group operates 13 casinos in Macau, including four self-promoted casinos and nine satellite venues. The company’s newest property is Grand Lisboa Palace (pictured) in Cotai.

Fitch expects SJM Holdings’ free cash flow to turn positive in 2024 and “expand further in 2025 and 2026”. That, in turn, will drive a “reduction in debt balance from HKD29 billion at end-September 2023 to HKD26 billion at end-2025 and HKD23 billion at end-2026,” wrote Fitch analysts Samuel Hui, Rebecca Tang, and Kalai Pillay.

“SJM Holdings will focus on deleveraging as it maintains a conservative financial policy, in Fitch’s view,” they added.

According to the institution, SJM Holdings ratings “are constrained by its high leverage from the debt built up for the Grand Lisboa Palace expansion and due to the Covid-19 pandemic”.

The recovery seen in Macau’s gaming and tourism industries, “together with the continued ramp up of Grand Lisboa Palace, is likely to improve SJM Holdings’ leverage metrics to within the ‘BB-’ threshold in the coming years,” stated the ratings agency.

Fitch noted that the Grand Lisboa Palace property “continues to ramp up, even though the progress has been slower than expected”.

At the group’s other self-promoted casinos, the firm had seen a “strong recovery”.

“We project Grand Lisboa and other self-promoted casinos’ adjusted property EBITDA to recover to 95 percent of 2019 levels in 2024,” stated the institution.

The group’s business however continues to be “dragged by excess costs” linked to its satellite casinos. SJM Holdings has had to take on the excess costs of redundant staff from the closure of five satellite casinos at year-end 2022, amounting to HKD488 million through the first nine months of 2023.

The company’s management has said it expects the excess costs to be absorbed fully “through attrition and redeployment by 2025”.

According to Fitch, SJM Holdings has made “steady progress so far” regarding the number of redundant staff, “with headcount dropping below 2,000 in the third quarter of 2023, from 2,700 at end-2022,” with the “daily run rate of excess costs dropping to HKD1.6 million in third-quarter 2023 from over HKD2 million in 2022”.

The ratings agency also said that SJM Holdings has a manageable investment pipeline, as well as adequate liquidity, including HKD5.0 billion of cash and deposits, and HKD3.3 billion of undrawn revolver facilities, as of September 30. That would be “enough to meet HKD1.0 billion of bank loans due within one year,” it noted.