Melco Resorts Earnings: Recovery Continues, but Performance Lagged Industry Peers

We lower our fair value estimate of Melco Resorts MLCO to $12.60 per share from $13.50, following the company’s weaker-than-expected third-quarter results. We think the miss is primarily due to a weaker VIP volume and win-rate at the company’s Macao properties, while the mass segment performance and overseas business were largely in line with expectations. Management remains upbeat about the overall recovery trend in Macao, with nonjunket VIP revenue in October hitting the 2019 levels. However, elevated debt, coupled with the rising interest rate, have dampened the bottom line and Melco remained in net loss of $121 million in the quarter. This is slightly disappointing, as major peers have already returned to net profit in the first half of 2023. The shares fell sharply by 15% after the earnings release on Nov. 7, amid market concerns over the company’s elevated debt and interest expense. We think the selloff is overdone, and the shares are undervalued currently.

We lower our 2023-25 revenue forecasts by 5%-10% and reduce adjusted EBITDA by 8%-11% to reflect slightly weaker gaming volume and higher operating expenses amid keener competition in Macao. In addition, we expect higher interest expenses to lead to a net loss of $66 million in 2023, before returning to net profit of $344 million in 2024 and $762 million in 2025, compared with our earlier forecast of net profit of $338 million in 2023, and $783 million and $983 million in 2024 and 2025, respectively.

As of the end of September, Melco had total cash of $1.5 billion. Although net debt remained high at $6.3 billion, there are no material maturities until 2025, and management continues to prioritize deleveraging over new business initiatives. We believe a more durable recovery in gaming demand should improve the Macao casinos’ profitability and cash flow, easing concerns about Melco’s financial liquidity and debt burden.