Melco Resorts: Bullish As Casino Portfolio Off To A Strong Start In 2024 (NASDAQ:MLCO)

Melco Resorts & Entertainment Limited (NASDAQ:MLCO) recently reported its latest quarterly results, highlighted by an ongoing rebound at the company’s Macau, China casino properties. Data shows regional tourism and gaming revenues are back on track to reclaim pre-pandemic records.

We covered MLCO in 2023 with a bullish article that admittedly suffered from poor timing, with shares sharply lower over the period. Still, our update today doubles down on that idea with a new sense that the company has finally turned a page compared to the several years of pandemic-era disruptions.

The company has taken steps to improve its outlook and long-term potential, including an ongoing diversification outside of Macau. We see good value in MLCO at the current level and expect shares to climb higher going forward.

MLCO Earnings Recap

MLCO Q1 earnings per American Depositary Share (EPADS) of $0.035 reversed a loss of -$0.0184 in the period last year. Consolidated revenue of $1.1 billion represented an increase of 55% year-over-year.

The top-line momentum has allowed financials to benefit from operating leverage and the improved scale, with total operating costs and expenses declining as a percentage of revenue.

The adjusted property EBITDA reached $299 million, up 57% from $191 million in Q1 2023. Within that number, the performance at the flagship “City of Dreams” and “Studio City” Macau resorts stood out.

City of Dreams adjusted property EBITDA at $153 million increased by 61% y/y. Management noted a 41% increase in “rolling chip volume” and a 45% higher “mass table drop” as measures of underlying gaming activity.

At Studio City, the ramp-up in the mass market table games drop was even stronger, up 92% y/, with the property also capturing an outperforming rolling chip win rate of 3.72% compared to an expected range of around 3%. Studio City’s adjusted property EBITDA at $88 million was more than four times higher than the $21 million result in the period last year.

The trends in Macau have helped balance more volatile trends at the smaller satellite properties including “City of Dreams Manila” where the win rate was down this quarter based on luck factors.

Separately, the company believes the ongoing conflict in the region has impacted results at the Cyprus “City of Dreams Mediterranean” property, but is looking forward to a strong summer season.

In terms of the balance sheet, a major theme for Melco has been addressing its large debt position. The level of gross debt has continued to decline, ending the quarter at $6.1 billion from $6.4 billion in Q1 2023.

With the annualized run rate for adjusted property EBITDA approaching $1.2 billion, a net leverage ratio of around 5x remains elevated, but manageable given the underlying cash flows and debt maturity profile.

The latest update was a corporate move to extend a revolving credit facility from 2025 to 2027, with management guiding for further plans to pay down debt.

What’s Next For MLCO?

Overall, the takeaway is that the results from Melco are moving in the right direction, with a runway for improvement.

On this point, data for April into Q2 from the Macau Gaming Inspection and Coordination Bureau shows that gross gaming revenue in the region is up 26% y/y and 52% year-to-date compared to 2023.

At the same time, total revenues remain about 21% from the level in 2019. Similarly, the number of daily average visitors for the year around 130k remains about 18% lower than in the same period nearly five years ago.

The opportunity for Melco is that as those key metrics “normalize,” the company now benefits from an expanded operating base that includes a more diversified global footprint, but also significant investments in non-gaming assets.

This dynamic is evident considering the last 12 months of “mass table drop” revenue has already approached 2019 levels based on a higher win-per-table rate that follows a global theme of people generally gambling more compared to before the pandemic.

What has changed is Melco’s reduced exposure to the “VIP” high-roller segment, which reflects changing legislation in Macau, pushing back on Junket operators who are sourced by promoters to incentivize gaming at specific properties.

Simply put, Melco’s business has shifted more toward the mass market, but is still on the premium side of amenities and entertainment options. Mass table as a percentage of total gross gaming revenue has increased to 84% from 57% in the past 7 years.

We make the case that this trend is a positive for the business as it reduces quarterly variability and works to leverage other revenue channels including hotel capacity and adjacent retail options.

Ultimately, as the number of Macau visitors exceeds 2019 levels, Melco’s GGR and adjusted property EBITDA have room to outperform as part of the bullish case for the stock.

All this is in the context of more favorable macroeconomic data out of China showing a rebound in activity that is driving more positive sentiment towards the region. Naturally, Melco Resorts is well-positioned to capture an improvement in the region as consumers look to travel.

According to consensus, MLCO earnings are set to turn positive this year with an EPS estimate of $0.24 and accelerate going forward. We believe these forecasts are reasonable, with the latest Q1 results working to inspire confidence a financial turnaround is underway.

Focusing on that 2025 consensus EPS of $0.64, MLCO is trading at a 1-year forward P/E under 12x. We believe this level is compelling relative to global gaming peers including names like Las Vegas Sands Corp (LVS), MGM Resorts International (MGM), and Wynn Resorts Ltd (WYNN) that have commanded a higher premium.

Final Thoughts

We rate Melco Resorts & Entertainment Limited as a buy with a path to rebound toward the 2023 high above $14.00 per share as an upside target over the next year. The attraction of the stock is the company’s leadership position and unique exposure to Macau gaming, which shares a connection to high-level consumer spending trends in China and the broader Asia-Pacific region.

The way we see it rolling out is that the ability of Melco to continue posting a solid quarterly update with climbing profitability should go a long way to support a sustained rally in the stock.

On the downside, the main risk to consider would be a more concerning deterioration of key operating or financial results. Signs that Melco is losing market share or underperforming in the Macau market could open the door for a deeper selloff.

Monitoring points over the next few quarters include the property EBITDA as well as the mass table and VIP rolling chip metrics.