Macau casino stocks trade at steep discount again
Third-quarter earnings reports from six Macau franchisees were mostly positive. But the casino operator's share price did not respond and has now depreciated unusually sharply.
So much so that the combined market value of the six gaming companies operating in the Chinese enclave is back to where it was a year ago and is still half of what it was before the coronavirus pandemic struck. In a new client note, a team of J.P. Morgan analysts found that the six franchises have a combined market capitalization of $59 billion, more than Sands China parent Las Vegas Sands Corp. (NYSE: LVS )’s market capitalization is 62% higher.
Macau's six operators are Galaxy Entertainment, Melco Crown Entertainment (NASDAQ: MLCO), MGM China, Sands China, SJM Holdings and Wynn Macau.
While Galaxy Group and Wynn Resorts' Wynn Macau unit (NASDAQ: WYNN ) recently missed third-quarter earnings before interest, taxes, depreciation, and amortization (EBITDA) estimates, analysts are puzzled by the group's low metrics , especially considering that news traffic is largely positive.
'Excessively punitive' treatment of Macau casino stocks
Macau operator stocks start 2023 strong. But recently this has been rejected by the organization. JPMorgan analysts think this is too harsh.
The combined market capitalization of the six operators is just $59 billion, back to where it was a year ago, making us feel the punishment is too harsh," the analysts wrote.
Complementing the bank's thesis is that the darkest clouds that previously hampered Macau casino stocks have passed and several operators are generating enough free cash flow (FCF) to cover the debt they take on to sustain themselves during the pandemic livelihood.
"We recognize that valuations by themselves may not be driving stocks in this market, but we have to believe these stocks are oversold. At current free cash flow yield levels... using cash flow alone to pay off MGM, Wynn and The debt of a company like Melco should generate an annual return on equity of around 15%. We see great value in the Macau name," the JPMorgan analysts added.
Macau casino stocks could be at historic lows
In the United States, a growing number of market participants are claiming that small-cap stocks are at historic lows. JPMorgan analysts believe the same applies to Macau gaming stocks.
Many of these companies are actually trading at historically low prices in terms of valuations," the bank said. "This is really attractive to us because: (1) Gaming licenses have been fully updated, eliminating the The largest backlog in the industry in ten years; (2) The business structure is now better than ever, with about 90% of revenue coming from mass games and non-gambling games, which have higher profit margins and are more stable and more secure than VIP. Predictable; (3) Even under a fairly conservative macro scenario, we believe downside risks to the consensus are limited. "
Investors particularly benefit from the geographic diversification of Las Vegas Sands, Melco Crown, MGM and Wynn. However, LVS, Melco Crown and Wynn rely heavily on Macau for the majority of their EBITDA and revenue.
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Source: www.casino.org