2023-03-24 01:17:53 ET
Summary
- The company posted weak results in Q4, but the performance improved sequentially.
- Melco is one of the six companies to be awarded a 10-year gaming concession by the government in Macau.
- Its diversified portfolio along with robust project completion and commencement plans add to the company's growth prospects.
Investment Thesis
In the last six months, Melco Resorts & Entertainment ( MLCO ) saw investor confidence and gained good momentum recording gains of around 125%, despite posting a relatively subdued performance in Q32022. For Q42022, the results posted are on the weaker side but have improved as compared to Q32022. Reopening in China and activities in Macau, the largest casino and gambling market, and being one of the six companies to be awarded a 10-year gaming concession by the government in Macau prove to be strong tailwinds for Melco's business and its future performance. Its diversified portfolio along with robust project completion and commencement plans add to the company's growth prospects. This makes MLCO stock a suitable investment opportunity for long-term investment.
About the Company
Melco Resorts is a developer and owner of integrated resort facilities over Asia and Europe. It has three major casino-based operations in Macau and one casino-based operation in the Philippines. The company's subsidiary, Melco Resorts Leisure, manages the Philippines’ business. Its non-casino-based operation in Macau is named Mocha Clubs. In 2019, Melco expanded its operations to Europe by acquiring a 75% equity interest in Integrated Casino Resorts Cyprus, which owns the City of Dreams Mediterranean and other casinos in Cyprus. Macau, where gambling in casinos is legal, remains the primary market in which Melco competes.
Diversity in the Portfolio - A Silver Lining
The 2022 financial performance of Casino and Gaming companies was hurt by the citywide lockdown announced by Macau in mid-2022 to curb COVID-19 cases. Melco Resorts and Entertainment is one of the major players in this industry and had to face the headwinds caused by the uncertain regulatory environment. Since Q22022, Melco's financial performance started dwindling owing to the China lockdown. The following table illustrates the key reported numbers by the company in the recently declared results -
Adjusted Property EBITDA as well as Adjusted EBITDA, which are two of the key performance indicators for integrated resorts business, turned negative through the quarters of 2022 for operations in Macau (City of Dreams, Studio City, and Altira + Mocha). These negative numbers were sequentially lower than Q32023. The overall bearish impact was partly offset by positive adjusted EBITDA generated by City of Dreams Manila and Cyprus Operations. Melco’s key operating metrics show that diversification of operations in Europe and the Philippines along with Macau has proved to be a silver lining for the company.
The key operating metrics for the operating segments show that performance has improved sequentially as compared to Q32022 but declined heavily on a YoY basis. The highest hurting factor for City of Dreams was a 73% fall in VIP Rolling Chip whereas for Studio City was a 55% drop in Mass Table Drop and Total Gross Growing Revenue.
In 2023, Macau division’s gross gaming revenue jumped around 233% underpinned by the easing of the restrictions and COVID-19 test compulsions on travelers arriving in Macau from Mainland China, Hong Kong, and Taiwan.
Turning to the company’s fundamentals, at the end of 2022, Melco’s total current assets stood at $2,074 million, 1.73x of the total current liabilities of $1,198 million indicating a comfortable coverage of short-term liabilities. The company generated higher cash in 2022 as compared to 2021. Melco has a net debt of $6,461 million and a debt maturity profile which does not require any funds till 2024. The company loaded its balance sheet with substantial debt during the three affected years of the COVID-19 pandemic. In 2023, Melco repaid around $200 million drawn under an intercompany loan with Melco Resorts in 2022 and reduced around $500 million by repaying amounts under revolving credit facilities. This looks consistent with Melco’s priority of improving its balance sheet position by repaying the debt for the coming 2 to 3 years. These company efforts toward debt reduction strengthen its liquidity prospects.
A Focus on Shareholder Returns
Melco discontinued paying dividends in May 2020. It is constantly evaluating the right operating environment to restart the regular dividend payments and continue returning capital to its shareholders. In the past three challenging years, the company continued to return capital to shareholders in the form of share repurchases. Despite of a tight operating environment, the company has continued returning wealth to shareholders through share repurchases, which are higher in 2022 as compared to 2021. This indicates the company’s focus on generating wealth for shareholders and it expects to continue the trend along with opportunistic dividend increase.
Melco Resorts and Entertainment
Seeking Alpha’s proprietary Quant Ratings rate Melco Resorts and Entertainment as “hold.” The stock is rated high on momentum and growth factors, but low on valuation and profitability.
Growth Drivers
A Comeback of the Casino and Gaming Industry
January 2023 has been a cheering month for the casino and gaming industry in Macau, a special administrative region of China. The industry has been facing the brunt of the COVID-19 pandemic for around three years due to strict restrictions and lockdowns in China, which was the majorly affected country. Macau is the largest gambling hub but faced a major downturn due to travel bans, closed resorts, and lockdown restrictions. At the start of 2023, China announced the lifting of restrictions on travel which led to a notable rise in gambling revenue in Macau. Macau saw an attractively higher number of visitors, surpassing the number in the past three years in January 2023, after a week-long new year holiday. Analysts and investors also turned bullish on casino stocks fueling their prices.
Strong Projects Outlook
Melco’s portfolio of projects bears some key projects in pipeline which bolsters the revenue outlook for all the three geographical segments. In Macau, Melco’s Studio City is a gaming, retail, and entertainment resort located in Cotai. It provides highly differentiated non-gaming attractions. The company is progressing towards the construction of Studio City Phase 2 and will be commencing its operations through Q2 and Q3 of 2023. A key differentiator for the company is that the first stage of Phase 2 opening in Q22023 is likely to include a hotel tower and indoor water park, which would be a unique attraction in Asia. In Philippines, Melco is optimistic that higher junket activity and continued growth due to international travel will support the growth in gaming volumes which are already near pre-pandemic levels. In Cyprus, City of Dreams Mediterranean is under construction and upon completion in Q22023, is predicted to become Europe’s largest premier integrated resort. The crossing of pre-pandemic volume and GGR levels by Cyprus is another cherry on the cake. The capital spends for Cyprus in 2023 is projected by Melco to be $60 million to $65 million and for the remainder of Studio City Phase 2, $75 million to $80 million. The maintenance capex is guided to be $150 million to $160 million.
Gaming Concession - A Ray of Hope
In December 2022, Melco announced that the Macau government has awarded a ten-year concession to operate games of fortune and chance in casinos in Macau to Melco Resorts Limited, a subsidiary of Melco Resorts and Entertainment. Melco is among the six companies along with Sands China, Wynn Macau, Galaxy Entertainment, MGM China, and SJM Holdings to receive the 10-year licenses that run from January 1, 2023, to December 31, 2033.
Conclusion
Melco Resorts and Entertainment's otherwise weak financial performance will be strongly aided by the gaming concession received for the next 10 years in Macau. Melco is executing some impressive and large-scale projects, the success of which will significantly lift the company's financial performance. Its diversified segments and their improving performance indicate strong growth prospects. With the recovery of casino operations and the company's potential to grow in the current industry environment, Melco’s financial performance is expected to gradually return to its pre-pandemic levels. This makes MLCO stock an attractive investment option for long-term investors.
For further details see:
Melco Resorts: Easing Restrictions And Government License Provide Tailwinds