Macau gaming stocks are currently undervalued and represent a prime long-term opportunity for investors, according to various research notes issued this week.
Latest valuations follow a 25% decline in stock prices over the past month amid ongoing US-China trade tensions and concerns over potential risks to Macau gaming licenses, with the concessions of all six operators set to expire in 2022.
According to JP Morgan’s DS Kim and Christopher Tang, “recent corrections and expected volatility in shares – weighed by systematic risks, not by industry issues – have opened an attractive opportunity to make sizable yet predictable returns.
“We think the sector appears cheap already on ‘19/20 estimates, trading at 11x/10x EBITDA and 7-8% recurring FCF (free cash flow) yield. In any case, we believe current levels offer an attractive opportunity for long-term investors on an 18+ month horizon, by which time macro issues will hopefully have improved and multiples should have normalized.”
JP Morgan has upgraded Galaxy, MGM, Wynn and Melco to Overweight, joining Sands, with SJM downgraded to Neutral.
Morgan Stanley analysts Praveen Choudhary, Dan Xu and Thomas Allen also state that stock valuations look cheap at an average of 9.1x EV/EBITDA on 2020 estimates. They note that earnings revisions have now bottomed out, with 2Q seasonal weakness providing a good entry point for investors given that license risks are not of any immediate concern.
Analysts point to the continued strength of Macau’s mass market as providing all the upside, with Morgan Stanley raising its 2019 mass estimate from +7% growth to +10%, although VIP estimates have fallen from -6% to -14%. Likewise, the GGR forecast has been revised down by 1% but EBITDA up by 2%.
“We believe high FCFE yield and robust mass revenue growth make this industry defensive, but prolonged trade tension could mean lower multiples for longer,” they add.
Morgan Stanley names Melco, MGM and Sands as its preferred plays with weaker VIP and construction disruption hurting Galaxy and Wynn. However, it also points to SJM as an opportunity given the upcoming launch of Grand Lisboa Palace in Cotai.
“We see limited downside to the (SJM) stock,” the investment bank said.