Melco Resorts Offers Superior Macau Recovery Setup, Says Analyst
Posted on: September 17, 2020, 10:21h.
Last updated on: September 17, 2020, 02:02h.
Melco Resorts & Entertainment’s (NASDAQ:MLCO) status as an Asia-based company keeps it away from some of the controversies facing other Macau operators. It also makes it a top idea for investors seeking exposure to the world’s largest casino center, according to one analyst.
In noting the gaming company is “de-risked” from its peers, Roth Capital analyst David Bain reiterates a “buy” rating on the City of Dreams operator, while pointing out shares of Melco are attractively valued, among other favorable traits.
We believe MLCO is the go-to stock with Macau exposure, particularly given the current environment,” said Bain in a note to clients.
In Macau, Melco also operates Altira Macau and Studio City in addition to City of Dreams. Because of the coronavirus pandemic, 2020 is a year of struggles for concessionaires in the special administrative region (SAR).
The weakness is reflected by an almost 23 percent year-to-date loss for Melco stock. However, some data points confirm the operator is pilfering VIP and premium mass market share from rivals. Bain said that trend was on display in the June quarter.
Less Risk, More Upside
There are six Macau concessionaires, three of which are US-based companies: Las Vegas Sands (NYSE:LVS), MGM Resorts International (NYSE:MGM), and Wynn Resorts (NASDAQ:WYNN).
Amid ongoing geopolitical tensions between the world’s two largest economies, analysts believe there is some concession renewal risk facing US operators in Macau. Gaming licenses in the SAR come due in 2022, and potential headwinds for those companies are heightened because of the Trump Administration’s aggressive posture toward China, including a recent ban of the messaging app WeChat.
Bain points out Melco isn’t levered to concession renewal risk, the WeChat controversy, and possible anti-US casino sentiment. In fact, he says Melco stock is cheap.
“However, shares trade at 9.4x calendar year 2022 enterprise value/earnings before interest, taxes, depreciation and amortization (EBITDA) versus LVS at 14.8x and Wynn at 13.2x,” he said. “At 13x, MLCO would trade for ~$30 a share.”
The Roth analyst is tepid on some of the US-based Macau operators, citing a weak VIP recovery and those companies’ exposure to the still-slack Las Vegas market.
Unusual Macau Environment Makes Melco Safe Choice
In a normal operating climate, it’s not unusual for all six Macau concessionaires to thrive. But this year is far from standard. Bain says equity exposure to Macau offers investors strong upside potential, but myriad variables muddy the waters at the operator-specific level.
“Net, we believe MLCO offers the strongest vehicle to participate in potential Macau growth while mitigating certain peer-levered risks,” said the analyst.
Based in part on Melco’s ability to continue winning VIP and mass market share in the coming quarters, Bain places a $35 price target on the stock. If that forecast proves accurate, the shares would nearly double from the $18 area at which the name resides at this writing.
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