Melco Earnings Growth Can Aid Debt Reduction

Melco Resorts & Entertainment (NASDAQ: MLCO) is likely on pace to grow earnings before interest, taxes, depreciation, and amortization (EBITDA). That should be enough going forward to reduce leverage over the next year to two years to levels last seen before the coronavirus pandemic.

In a new report, S&P Global Ratings said the pace of Macau’s 2024 recovery to date is at least in line with expectations. Melco has earnings momentum as it gains share among mass-market visitors to the gaming enclave, the report said.

MLCO’s EBITDA recovery could accelerate in the coming quarters. Solid mass gaming trends and incremental contributions from Studio City Phase 2 will likely support this. During the recent Chinese New Year holiday, the company’s mass GGR was up 22% from 2019 levels, as the company benefited from Chinese arrivals,” according to the research firm.

Like the other Macau concessionaires, Melco took on large amounts of debt during the COVID-19 crisis simply to stay afloat. Market observers believe the operators can handle obligations coming due this year and in 2025. But they also see debt-reduction efforts as sluggish.

Momentum for Melco

S&P Rates Melco “BB-“ with a “positive” outlook. That’s a junk rating – a status shared by several of the other Macau casino operators.

“We estimate Macao’s mass gross gaming revenue (GGR) was up 12%-13% from 2019 levels in the first two months of 2024. This trends at the higher end of our 5%-15% growth forecast for 2024, compared with 2019 levels,” added S&P

Specific to Melco, the City of Dreams operator has more than $1 billion in cash on hand and no debt maturing before 2025.

Other Positive Factors for Melco

Melco’s ability to gain share among mass-market bettors is crucial for two reasons. First, operators’ profits from that segment are surging. Second, Macau’s VIP market still hasn’t recovered in earnest from the pandemic and the splintered junket industry.

“MLCO’s property EBITDA was also higher than 2019 levels in that period. Our base case assumes the company’s EBITDA will be 94% of 2019 levels in 2024 and 7% higher than 2019 levels in 2025. This compares with about a 75% level in the fourth quarter of 2023,” concludes S&P.