2023-12-12 04:27:36 ET
Summary
- MLCO's recent quarterly results were below expectations, and there are concerns about a potential decrease in Chinese tourists visiting Macau.
- Despite the uncertainties, the Company's valuations are attractive, and there are potential catalysts associated with capital allocation.
- Melco Resorts stock is awarded a Hold rating, after reviewing its outlook and valuations.
Elevator Pitch
Melco Resorts & Entertainment Limited ( MLCO ) shares are rated as a Hold. In the near term, MLCO's prospects seem to be murky, taking into account its recent quarterly performance, revisions in consensus estimates, and the rise in influenza cases. On the flip side, I deem Melco Resorts' stock to be cheap with potential capital allocation catalysts for the mid-term. As such, I have a Neutral view and Hold rating for MLCO.
Company Overview
In the company's fiscal 2022 20-F filing , MLCO describes itself as "a developer, owner and operator of integrated resort facilities in Asia and Europe." Melco Resorts' shares were first listed on NASDAQ in 2006 .
Melco Resorts' Normalized EBITDA Mix By Property
MLCO's Key Asian Asset, Studio City
Melco Resorts' Key European Property, City Of Dreams Mediterranean
In its Q3 2023 results press release , Melco Resorts shared that the bulk of its capital expenditures for the latest quarter were allocated to Studio City Phase 2 and City of Dreams Mediterranean.
Share Price Underperformance Is Justified By Uncertainty Over Near-Term Outlook
Since Melco Resorts reported its Q3 2023 financial results on November 7 before trading hours, MLCO's shares have fallen by -12.1% as compared to a +5.5% rise for the S&P 500 in the same time frame. This implies that Melco Resorts has underperformed the broader market by -17.6 percentage points in the past month or so.
There are signs suggesting that MLCO's business outlook in the short term is murky, which might help to explain the company's stock price underperformance in recent times.
Firstly, there are unfavorable read-throughs from Melco Resorts' most recent quarterly results. MLCO's actual non-GAAP adjusted EBITDA of $262.1 million for the third quarter of 2023 turned out to be -8.2% below the analysts' consensus EBITDA estimate of $285.4 million (source: S&P Capital IQ) .
There were two key factors that were responsible for MLCO's Q3 2023 EBITDA miss.
One factor was that the recovery in Melco Resorts' Macau gaming operations fell short of expectations. Based on my calculations, MLCO's Q3 2023 adjusted property EBITDA for its Macau properties had recovered to roughly two-third of pre-COVID levels in Q3 2019. In comparison, its key Macau gaming peer Sands China ( SCHYY ) ( SCHYF ) [1928:HK] saw its adjusted property EBITDA for the recent third quarter grow to more than 80% of pre-pandemic levels. The other factor was that MLCO's City of Dreams Mediterranean asset was negatively impacted by the Israel-Hamas war.
Secondly, the market has a negative view of MLCO's near-term prospects as evidenced by the change in consensus financial projections.
The consensus Q4 2023, Q1 2024, and Q2 2024 top line estimates for Melco Resorts were revised downwards by -3.1%, -2.0%, and -1.2% , respectively in the last month. In the past three months, seven of the 11 analysts lowered their full-year FY 2023 revenue forecasts for MLCO. During the same time period, the consensus FY 2024 top line projection for Melco Resorts was cut by -4.8%.
Thirdly, there are worries that a fewer number of Mainland Chinese tourists might visit Macau due to an increase in influenza cases.
A recent December 4, 2023, Seeking Alpha News article cited research from Jefferies ( JEF ) highlighting that "the recent increase in respiratory illness in Northern China is creating concern on a potential impact with Mainland Chinese overseas travel."
In a nutshell, there is significant uncertainty over how Melco Resorts' businesses could perform in the coming quarters, and that has hurt MLCO's share price performance.
But MLCO's Valuations Are Attractive With Potential Capital Allocation Catalysts
Following the correction in MLCO's shares in the recent month or so, Melco Resorts' stock has become much more attractively valued, and there could be potential catalysts relating to capital allocation that could materialize for the stock in the future.
Melco Resorts' current valuations seem to be undemanding based on both historical and peer comparisons. Prior to COVID-19, MLCO's five-year mean consensus forward next twelve months' EV/EBITDA multiple was 11.1 times as per S&P Capital IQ valuation data. As a comparison, the market is now valuing Melco Resorts at 8.0 times consensus forward next twelve months' EV/EBITDA. MLCO is also trading at a discount to its key gaming peers as highlighted in the table presented below.
Peer Valuation Comparison For Melco Resorts
Stock | Consensus Forward Next Twelve Months' EV/EBITDA Valuation Multiple |
Melco Resorts | 8.0 |
Wynn Resorts, Limited ( WYNN ) | 8.5 |
MGM Resorts International ( MGM ) | 9.1 |
Sands China | 11.1 |
Galaxy Entertainment Group Limited ( GXYEF ) ( GXYYY ) [27:HK] | 13.2 |
Source: S&P Capital IQ
It is worth noting that there are potential capital allocation catalysts for MLCO that might be realized in the medium term.
Melco Resorts stressed at the company's most recent Q3 2023 earnings briefing that its "#1 objective" and "#2 objective" are deleveraging and "returning money back to shareholders."
As per S&P Capital IQ data, MLCO's net debt-to-EBITDA ratio as of end-Q3 2023 was high at 7.2 times. Also, the company has yet to resume dividend payments or initiate a new share repurchase program.
Looking ahead, Melco Resorts' allocation of capital to debt paydown, dividends, or share buybacks will help to drive up the company's share price. That said, this is likely to be an intermediate-term catalyst, as MLCO's key Macau business operations are some way from getting back to pre-pandemic levels (Q3 2023 EBITDA at two-thirds of pre-COVID numbers) to allow for more capital to be allocated to deleveraging and shareholder capital return.
Final Thoughts
MLCO's short-term outlook is uncertain, but the stock's valuations are undemanding. This means that a Hold rating for Melco Resorts is fair.
For further details see:
Melco Resorts: Consider Both Outlook And Valuations