The “lacklustre” ramping up of business at MGM Cotai (pictured) had been “off-putting for many” investors, but the favourable pricing of the stock of the resort’s promoter, MGM China Holdings Ltd made the former factor “almost irrelevant. So said a Monday report from JP Morgan Securities (Asia Pacific) Ltd, previewing the second-quarter earnings season for Macau casino operators.
“At this price – 9x EBITDA and 10 percent free cash flow yield on 2020 – we think it’s almost irrelevant how disappointing the ramp-up is” for MGM Cotai, said analysts DS Kim, Jeremy An and Christine Wang, referring initially to earnings before interest, taxation, depreciation and amortisation.
As well as giving some thoughts on Macau’s six operators, the financial institution also restated its forecast for Macau-market gross gaming revenue (GGR) for the rest of the year.
“We keep our GGR forecast unchanged at -1 percent for 2019,” stated the JP Morgan team. The authors added that implied VIP GGR at -13 percent for the year, and mass gaming +12 percent for the period, although they stressed, “we err on the side of caution amid an uncertain macro[economic] backdrop”.
The JP Morgan analysts further stated: “There’s a good likelihood our numbers will prove bit too conservative (especially if VIP continues to recover from here), which in turn would allow us to happily upgrade the numbers along the way.”
Regarding Melco Resorts and Entertainment Ltd, the institution focused on that gaming firm’s Hong Kong-listed parent Melco International Development Ltd, rather than the Nasdaq-listed Melco Resorts.
“For investors who don’t trade United States-listed stocks, we view Melco International (a holding company that owns 55.8 percent of Melco Resorts, based on a pre-forma reflecting Cyprus transaction) as providing “cheaper access” to Melco Resorts,” said JP Morgan.
The institution added Melco International’s stake in Melco Resorts “is currently worth US$6.2 billion which is already 40 percent higher than its own enterprise value (or, 60% higher than its own market cap).”
The JP Morgan note says of Galaxy Entertainment Group Ltd: “In the medium term, we think Galaxy continues to offer the best and most definable growth outlook, with its planned opening of the Galaxy Macau phase three (from 2021) and phase four that will essentially double its footprint when completed.”
Galaxy, Wynn, Sands China, SJM
The brokerage regards the valuation of Galaxy Entertainment’S stock – at 11.7 times EBITDA and 7 percent free cash flow yield – as presenting an attractive opportunity for long-term investors that can follow a buy-and-hold strategy over the next year or two.
Turning to Wynn Macau Ltd – the Macau unit of U.S.-based Wynn Resorts Ltd –JP Morgan describes its real estate assets as “among the best in global gaming, which is supported by a best-in-class management team”.
The current share price of the Wynn Macau Ltd entity “implies a free cash flow yield of 8 percent to 9 percent in the estimates for the 2020 and 2021 financial years, most of which could be returned to shareholders, in our view, if history is any indication,” the report stated.
“We comfortably model dividend yields of 5 percent to 7 percent for the estimates for the 2019 to 2021 financial years, which, along with its 11 times forward enterprise value or EBITDA (versus [the] historical average of 16x), presents a highly attractive investment case.”
JP Morgan thinks shares in Sands China offer an opportunity to invest in Macau casino stocks that is relatively low-risk, in view of what it says is that company’s “unparalleled dominance” of the mass market for casino gaming in Macau compared to the VIP segment.
“In the medium term, we’re upbeat about opportunities that its two new projects can bring (two luxury suite towers in 2020 and the Londoner in 2021) which, we believe, can generate some of the highest return on invested capital in Macau, and work as a growth optionality for the stock, given seemingly low expectations by investors,” the note says.
Commenting on SJM Holdings Ltd, the brokerage said the casino firm’s under-construction Grand Lisboa Palace resort in Cotai – that group’s first foray beyond the traditional Macau casino districts – offered “potential” in the long term”.
But the financial institution saw no more than 14 percent “potential upside” for the stock, compared to 20 percent for peers.
“SJM’s relative valuation merit has dissipated completely, trading at 11.3 times the estimate of EBITDA for 2020, which is same as its peers,” the note said. “This does not appear too attractive to us (relatively speaking), if we consider the possibility of an opening delay,” for Grand Lisboa Palace, said the analyst team.
JP Morgan estimates that resort will open only in the second quarter of 2020. SJM Holdings’ current Macau concession is due expire in June 2022, along with those of the other five operators.
The institution also noted the potential for “teething issues” associated with SJM Holdings’ “limited experience in integrated resort and premium-mass businesses”. Particular issues included “player database” question marks and a “limited host network” said JP Morgan.
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”There are likely to be cancellations of some Chinese New Year casino and junket parties and events [in Macau]”
Vitaly Umansky, Eunice Lee and Kelsey Zhu
Sanford Bernstein analysts