An announcement by SJM Holdings earlier this week warning of a HK$1.21 billion (US$154 million) impairment charge related to past investments into Macau casino Jai-Alai and the closure of seven other casinos operating under SJM’s license is unlikely to impact the company’s cash flow or EBITDA, according to investment bank JP Morgan.
Instead, JP Morgan analyst DS Kim said in a Tuesday note that the impairment – which will be included in SJM’s FY22 financial results when they are released later today – described the charge as a “non-event” given the relatively small contribution of both Jai-Alai and the other seven casinos to SJM’s operations.
The impairment was also a non-cash charge, Kim observed, while it has been known for some time that five satellite casinos running under SJM’s license were planning to close. The other two to be shuttered are SJM self-operated properties Casino Eastern and Casino Taipa.
While the vast majority of the impairment charge is linked to Jai Alai, Kim said, “Jai Alai was a very small casino with 20-odd tables and it hardly made any profits for SJM (even pre-COVID) due to its rent payment (the building is actually owned by Angela Leong, the fourth wife of late Stanley Ho). In fact, Jai Alai tables/operations will be moved to the adjacent Oceanus casinos, which is physically connected to Jai Alai anyway.
“As such, we do not think it will result in a negative impact on SJM’s cash flows/EBITDA.”
Kim said he expects SJM’s rationalization efforts will see one-third of its future profits generated by its Cotai integrated resort Grand Lisboa Palace, another third by peninsula property Grand Lisboa and the remaining third by its remaining satellite and self-run casinos.
However, he also cast doubt on the risk-reward profile of SJM stocks due to the company having “more ‘pockets’ of disappointment … versus most of its peers.”
“Operationally, its biggest and newly opened property, Grand Lisboa Palace, may take a long while to ramp up and achieve a critical mass of patrons to generate any sizable profits, given its poor location and a lack of destination appeal,” Kim wrote.
“Plus, the demise of junkets means that everyone will need to build up its own high-end business, namely premium mass and direct VIP, which may not be as easy for SJM as one may think, given its lack of experience or database in this area.
“Valuation-wise, the stock’s trading at more or less a similar multiple as its peers at ~10x EV/EBITDA. We thus see few reasons to buy this stock over others, and rate it Neutral given our relative preference in the sector.”
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