A successful bid for the land on which its Solaire Resort & Casino sits would be a negative for owner and operator Bloomberry Resorts Corporation’s balance sheet, cash flow, net income and valuation – but it could drive the company’s market value to a premium.
So say analysts at financial services firm Morgan Stanley in a report weighing the pros and cons of such a move after Philippine gaming regulator Pagcor announced it will auction off two parcels of land covering 160,359 square meters on the Solaire site for a minimum of Php37 billion later this month.
The land is currently being leased to Sureste Properties – a subsidiary of Bloomberry Resorts – who under the terms of the auction will be given last rights to match any bid to purchase the parcels.
In a Monday note, Morgan Stanley’s Alex Poon and Praveen Choudhary observe that the Php37 million asking price represents around 30% of Bloomberry’s market value and would therefore come with a number of risks. They include increasing net debt from Php8.3 billion to Php45.3 billion, reducing ROIC from 24% to 15%, reducing the amount of expected dividend in 2018 and raising interest expenses by around Php900 million.
However, the saving of lease payments of Php250 million per annum until at least 2033 “is not material in our view,” Morgan Stanley adds.
“If Bloomberry continues to lease the land from [another] new owner, the annual lease payment may increase by 9x to Php2.2 billion based on 6% gross rental yield on Php37 billion from the Php250 million that Bloomberry is paying currently.
“This will take down our 2018e EBITDA estimates by 13%. The current rent is Php250 million per annum for the first 10 years and inflates by 4% per annum after until July 2033.”
Purchase of the land could also see a valuation premium.
“The purchase may put Bloomberry’s valuation comparable to peers who own their land like Okada (private) and RWM (11x EV/EBITDA) – also given that we expect Bloomberry to begin regular dividends in 2018, and Quezon City and Solaire Phase 2 to drive long-term growth,” analysts suggest. “Macau and Singapore casinos do not own the land. Bloomberry FCFE of 9% (2018e) remains attractive, stay OW.”