Melco Rating Still Junk, But Earnings Could Soar This Year

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Posted on: March 21, 2023, 03:41h. 

Last updated on: March 21, 2023, 04:13h.

Melco Resorts & Entertainment (NASDAQ: MLCO) could see its earnings per share surge over the next several years as Macau continues its post-coronavirus rebound, but its credit rating and outlook could remain challenged for some time.

Melco US listing
Melco’s City of Dreams in Manila. The company could see an earnings spurt over the next several years. (Image: Wall Street Journal)

That’s the view of Moody’s Investors Service, which in a recent report, reiterated a junk rating of “Ba3” with a “negative” outlook on the City of Dreams operator.

The rating affirmation reflects our expectation that Melco group’s financial leverage will improve significantly over the next 2-3 years, as Macau SAR, China’s gaming market will recover strongly after China recently lifted its pandemic-related travel restrictions,” wrote Moody’s Vice President Gloria Tsuen.

While the 2023 Macau rebound is proving voracious, it’s also still in its early innings, meaning it will take time for the benefits to matriculate to Melco in terms of reducing debt. Tsuen sees the operator’s leverage remaining elevated over the next 12 to 18 months.

Strong Earnings Outlook for Melco

With Macau open in mostly token form last year, concessionaires took large losses to simply keep their casinos open, and Melco was no exception to that trend.

The operator lost $100 million last year, but Moody’s estimates that will improve significantly this year as the ratings agency forecasts earnings before interest, taxes, depreciation, and amortization (EBITDA) rise to $700 million before surging to $1.2 billion in 2024.

“These estimates are based on the assumption that Macao’s mass-segment GGR will return to about 75% of its level in 2019 and fully recover in 2024, although the VIP segment GGR will remain anemic in both years because of tight regulatory restrictions on the operations of junkets that previously drove the VIP business,” added Tsuen.

Much of that good news may already be priced into Melco shares as the stock has more than doubled over the past six months. After closing below $5 on Oct. 28, 2022, the stock closed at $12 on Tuesday.

Melco Has Resources, Time to Deal with Debt

While Melco’s leverage skews toward the high end of Macau operators and the “Ba3” category average, the gaming company has resources and time with which to ameliorate that scenario.

The Ba3 ratings also consider MRE’s good liquidity, underpinned by its combined cash and unused revolver of $1.9 billion as of the end of 2022,” concludes Moody’s Tsuen. “These resources and improving operating cash flows will be sufficient to cover the company’s capital spending and short-term debt repayments for the next 12-18 months. The company’s next key debt maturities will be in 2025.”

In Macau, Melco operates City of Dreams, Morpheus, Studio City, and Altira. Some analysts estimate the company has one of the best liquidity positions among all six concessionaires, indicating its debt burden can easily be dealt with, particularly as gross gaming revenue (GGR) figures improve.

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