Posted on: March 5, 2024, 02:25h.
Last updated on: March 5, 2024, 02:34h.
Melco Resorts & Entertainment (NASDAQ: MLCO) is likely on pace to grow earnings before interest, taxes, depreciation, and amortization (EBITDA) 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, and that Melco has earnings momentum as it gains share among mass-market visitors to the gaming enclave.
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.
Despite broadly low credit ratings, Macau gaming debt has been popular among global investors seeking alternatives in China’s often volatile high-yield credit market, indicating professional market participants are confident the gaming companies can handle interest payments. Gross gaming revenue (GGR) figures support that thesis.
“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 debut 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.
S&P noted Macau mass-market GGR was up 12% to 13% from 2019 levels in the first two months of this year. That’s at the higher end of the ratings agency’s 5% to 15% growth forecast for 2024. Melco’s EBITDA momentum reflects that growth.
“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.
