WYNN - Wynn Resorts: Valuation Has Become A Lot More Attractive

2023-06-29 14:16:39 ET

Summary

• I have a positive investment outlook for WYNN given the strong performance across its properties in Macau, Las Vegas, and Encore Boston Harbor, and the ongoing recovery in Macau's gaming industry.
• WYNN's valuation is currently more appealing, trading at 10x forward EBITDA, lower than its pre-COVID average.
• Risks to this investment thesis include another lockdown in China or regulatory crackdown on gambling in Macau, which could significantly impact the recovery and expected EBITDA growth.

Investment thesis

I reiterate my buy rating for Wynn Resorts ( WYNN ) with a more positive view on recovery in Macau. Recapping the 1Q23 results, performance has been flawless across Macau, Las Vegas, and at Encore Boston Harbor, with property level EBITDAR of $430 million. Looking ahead, I continue to view WYNN as a fantastic way to get in on the recovery theme in China and Macau. The focus continues to be that Macau recovery is still in its infancy, and the share price still below March 2021 levels. What has changed since my post in February is that valuation is now a lot cheaper at 10x forward EBITDA (it was 13x back then). The possibility of multiples reverting to pre-covid averages also further enhances the investment return potential in my opinion.

Progressive signs of recovery

The WYNN metrics are on the uptick, with the mass table drop in 1Q23 reaching 82% of 1Q19 levels as just one example. Tenant retail sales were also up 60% from 1Q19 levels, contributing to RevPAR at 95% of 1Q19 levels in the non-gaming sector. Notably, WYNN's operating leverage is strong, as evidenced by the 57 point gap between revenue growth and expenses growth that accompanied the recovery. It's important to remember that the recovery in Macau only began a few months ago; when it reaches full speed, WYNN's margins should expand even further. But what's more important is that the momentum from March and April has carried over into May in both Macau and Las Vegas. According to the information provided by management , the annual run rate of Macau GGR is now $22 billion. By extrapolating WYNN's current 14% market share, applying the same GGR to revenue conversion, and assuming an EBITDA margin in the high 20s, we arrive at an estimate of $700-800 million (50-60% higher than WYNN consolidated FY22 EBITDA). Given the still-early stage of the recovery, this is the level at which Wynn Macau was operating in 2017 and 2018, and it suggests that EBITDA might exceed previous heights.

Macau & Las Vegas

The management's comments about Macau are also very promising, with the number of daily mass drops having increased in April, direct VIP business having increased significantly, and occupancy and retail sales being in excellent shape. May's Golden Week performance is further evidence of robust underlying demand, with overall mass table drop being nearly 10% higher, direct VIP turnover being more than twice as high, and retail sales being 36% higher than the previous May. WYNN Las Vegas has also been performing well, generating $586.8 million in revenue and $231.6 million in EBITDA.

Valuation

WYNN valuation is now much more appealing since I last wrote about it. To begin with, WYNN is currently trading at 10x forward EBITDA, which is lower than its pre-covid average (range of 10x to 13x EBITDA). I remind readers that using the historical average that includes the covid years is inaccurate because it skews the multiple upwards. The question here is whether WYNN is deserving of a return to 12x-13x. In my opinion, it should, especially when compared to peers' valuations. According to consensus estimates, WYNN is expected to grow EBITDA by 165% over the next two years, ranking it first among peers in terms of expected earnings growth. WYNN, on the other hand, trades just slightly above the average, which I believe is unjustified. When compared to a more closely related peer, such as Churchill Downs (CHDN), WYNN should trade in a similar range (which is currently at 12x). I would also point out that, given the strong acceleration in growth, the stock's positive sentiment could drive multiples higher than its average in the near term.

If we assume consensus estimates are right, and at 12x forward EBTIDA, WYNN share price should be worth ~$159 which represents 53% upside from here.

Risks

The risk is another Chinese lockdown or a crackdown on gambling in Macau by regulators. This will effectively demolish the recovery thesis as well as any expectations for EBITDA growth. If that happens, I believe investors will sell their holdings in order to avoid a 60+% drop like what happened during Covid.

Conclusion

WYNN presents an attractive investment opportunity with a more positive outlook on the recovery in Macau. The company's solid performance across its properties and strong operating leverage indicate a promising future. Notably, the valuation of WYNN has become more appealing, currently trading at 10x forward EBITDA, which is significantly lower than its pre-COVID average. With the potential for multiples to revert to pre-pandemic levels and strong expected earnings growth, WYNN's stock price could experience significant upside in my opinion.

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