MGM China has been flagged as a significant opportunity for investors, with EBITDA growth tipped to outperform its Macau rivals through 2018 and 2019 on the back of MGM Cotai’s impending launch.
Financial services firm Morgan Stanley says MGM China represents major upside based on 2019 estimates, having underperformed the Hang Seng Index by around 26% and Macau group year-to-date by around 21% due to decreasing market share.
Key to its estimates is MGM Cotai, which will more than triple the company’s Macau hotel room inventory.
“In the next 12 months, the market should be looking at 2019 multiples at which MGM is trading at 10x EV/EBITDA and 9% FCFE yield,” said analysts Praveen Choudhary, Alex Poon and Thomas Allen.
“We think [this provides] a significant upside opportunity helped by the planned opening of the new Cotai casino in 4Q 2017.
“Cotai will double or triple the size of the company in terms of GFA and number of hotel rooms, and potentially revenue and EBITDA growth in 2018/19, which we think could drive re-rating similar to Wynn Macau.
“We upgrade MGM China from EW to OW and raise our PT to HK$22.0, implying 40% upside. MGM could see the highest EBITDA growth among peers in 2018 and thus drive outperformance versus peers.
“We also expect MGM to see the highest EBITDA growth among peers between 2017 and 2019, warranting a higher multiple. On top of this, MGM has a higher FCFE and dividend yield compared to the average of the other five players.”
Morgan Stanley predicts a number of advantages for MGM Cotai over Wynn Palace which it says should ensure it doesn’t disappoint like its next door neighbour did upon first opening in 2016.
They include being closer to the Cotai Strip and less exposed to ongoing construction of the light rail, with proximity to City of Dreams likely to create a premium mass cluster. It also predicts lower operating expenses and low market expectations as providing added value.
“Expectations appear low for MGM versus Wynn,” it said. “In case of Wynn, the company guided for US$630 to US$850 million of EBITDA from Wynn Palace in FY17, while consensus is expecting only US$200 to US$250 million from MGM Cotai in FY18.
“We expect MGM Cotai to generate EBITDA of US$233mn in 2018 and US$395mn in 2019, driven by mass market share of 4.4% in 2018 and 5.1% in 2019.”
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