Melco Resorts Earnings Tipped to Surge, Moody’s Maintains Negative Outlook

Melco Resorts & Entertainment (NASDAQ: MLCO) could see its earnings per share surge over the next several years as Macau continues its post-coronavirus rebound. But its credit rating and outlook could remain challenged for some time.

That’s the view of Moody’s Investors Service, reiterating a junk rating of “Ba3” with a “negative” outlook on the City of Dreams operator in a recent report.

The rating affirmation reflects our expectation that Melco group’s financial leverage will improve significantly over the next 2-3 years, as Macau SAR, China’s gaming market will recover strongly after China recently lifted its pandemic-related travel restrictions,” wrote Moody’s Vice President Gloria Tsuen.

While the 2023 Macau rebound is proving voracious, it’s still in its early innings, meaning it will take time for the benefits to matriculate to Melco regarding reducing debt. Tsuen sees the operator’s leverage remaining elevated over the next 12 to 18 months.

Strong Earnings Outlook for Melco

With Macau open in mostly token form last year, concessionaires took large losses to simply keep their casinos open, and Melco was no exception to that trend.

“These estimates are based on the assumption that Macao’s mass-segment GGR will return to about 75% of its level in 2019 and fully recover in 2024, although the VIP segment GGR will remain anemic in both years because of tight regulatory restrictions on the operations of junkets that previously drove the VIP business,” added Tsuen.

Much of that good news may already be priced into Melco shares, as the stock has more than doubled over the past six months. After closing below $5 on Oct. 28, 2022, the stock closed at $12 on Tuesday.

Melco Has Resources, Time to Deal with Debt

While Melco’s leverage skews toward the high end of Macau operators and the “Ba3” category average, the gaming company has the resources and time to ease that scenario.

The Ba3 ratings also consider MRE’s good liquidity, underpinned by its combined cash and unused revolver of $1.9 billion as of the end of 2022,” concludes Moody’s Tsuen. “These resources and improving operating cash flows will be sufficient to cover the company’s capital spending and short-term debt repayments for the next 12-18 months. The company’s next key debt maturities will be in 2025.”

In Macau, Melco operates City of Dreams, Morpheus, Studio City, and Altira. Some analysts estimate the company has one of the best liquidity positions among all six concessionaires, indicating its debt burden can easily be dealt with, particularly as gross gaming revenue (GGR) figures improve.