Macau’s SJM Holdings is tipped to turn free cash flow positive in 2024, allowing the company to focus on reducing its debt balance to more manageable levels over the coming years, according to ratings agency Fitch.
In a Thursday note, Fitch analysts revised the outlook on SJM from Negative to Stable and also affirmed its ratings at “BB-” – reflecting an “elevated vulnerability to default risk” but with the existence of business or financial flexibility to support the servicing of financial commitments.
This, it explained, was on the back of the robust recovery in visitation and gaming revenue in Macau and the continued ramp up of SJM’s Cotai integrated resort Grand Lisboa Palace (GLP), opened in 2022, which are seen as supporting SJM’s leverage metrics to within the “BB-” threshold in the coming years.
While the company’s ratings are constrained by its high leverage from the debt built up for the GLP expansion and due to the COVID-19 pandemic, Fitch said it expects this situation to improve over the next two or three years with Adjusted EBITDA to grow from HK$1.7 billion last year to an estimated HK$3.6 billion in 2024, HK$5.2 billion in 2025 and HK$6.6 billion in 2026.
“Fitch expects SJM’ free cash flow (FCF) to turn positive in 2024 and expand further in 2025-2026, driving a reduction in debt balance from HK$29 billion at end-September 2023 to HKD$26 billion at end-2025 and HK$23 billion at end-2026,” the agency wrote.
“SJM will focus on deleveraging as it maintains a conservative financial policy, in Fitch’s view.”
Key to SJM’s improved outlook will be GLP, which in 3Q23 took 1.6% of Macau-wide market share on GGR of HK$783 million. SJM management, Fitch analysts said, are hoping to grow this share to between 5% and 6% in the long-term, driven by improved connectivity and mass appeal through food and beverage, retail and event offerings.
Likewise, SJM’s self-promoted casinos, including peninsula property Grand Lisboa, are seen as recovering to 95% of pre-COVID levels in 2024, up from 91% in 3Q23.
Satellite casinos are proving more a drag, Fitch observed, in part due to carrying excess staff from the closure of five satellite casinos in late 2022. SJM is hoping to fully absorb these staff costs through attrition and redeployment by 2025, further aiding its efforts to reduce debt.
