MGM Resorts International (MGM) has passed another milestone on its path to building a new casino on Macau’s fast-developing Cotai strip. On January 9 MGM China Holdings, MGM Resorts International’s joint venture with the daughter of casino giant Stanley Ho, received formal government approval to build what will be its second resort/casino in Macau.
The joint venture will pay a land premium of $162 million to build a 1,600-room hotel, and a casino with 500 tables and 2,500 slot machines in Macau. The resort/casino is scheduled to open in 2017 at a projected construction cost of $2.5 billion.
How much is formal permission to build a casino that won’t open until 2017 worth? Working backward from a projected EBITDA (earnings before interest payments, taxes, depreciation and amortization) of $400 million in 2017, Deutsche Bank calculates that the development adds about $665 million to the equity value of MGM Resorts. (MGM Resorts International is a member of my Jubak’s Picks portfolio http://jubakpicks.com/the-jubak-picks/ )
But in my analysis the value of the 2017 casino still takes a back seat to improvements in MGM Resorts International’s balance sheet and any recovery in the Las Vegas market that the company dominates. During 2012 MGM Resorts was able to raise $8 billion in long-term capital with longer maturities and lower interest rates than the debt it replaced. The interest cost savings come to about $230 million a year. That will help push free cash flow at MGM Resorts to $476 million in 2013, according to Credit Suisse, from $216 million in 2012.
Revenue in Las Vegas is rising slowly but it is rising. Gaming revenue climbed by 3.6% year over year on the Las Vegas strip. Hotel room rates have recovered more quickly in most U.S. convention markets than in Las Vegas (which had to cope with both a national recession and local over-building), but that has created a pricing differential that now works in Las Vegas’ favor. (MGM Resorts controls 40,739 rooms on the strip—or 27% of all Las Vegas hotel rooms.)
I’m raising my target price on MGM Resorts International to $17.50 a share by November 2013 on the Macau news from my prior target of $16 a share.
Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/, may or may not now own positions in any stock mentioned in this post. The fund did own shares of MGM Resorts International as of the end of September. For a full list of the stocks in the fund as of the end of September see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/
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