Las Vegas Sands Share Valuation

Aug.22.14 | About: Las Vegas (LVS)

Summary

Intrinsic value is around $82 per share based on DCF, EBIT and Graham Valuation. The recent price slide is a great buying opportunity for investors.

Future growth in Macao, especially with the Parisian Macao, to be open in late 2015, is being ignored by Mr. Market.

The company's +25% FCF yield, 10% annual dividend increase plan, a 2.92% dividend yield, and share repurchase program make this a great long-term investment.

Get to know the company

Las Vegas Sands Corp. (NYSE:LVS) develops, owns, and operates integrated resorts in Asia and the United States. The company owns and operates The Venetian Macao Resort Hotel, Sands Cotai Central, the Four Seasons Hotel Macao, the Plaza Casino, and the Sands Macao in Macau, the People's Republic of China. It also owns and operates the Marina Bay Sands in Singapore; The Venetian Resort Hotel Casino, The Palazzo Resort Hotel Casino, and Five-Diamond luxury resorts on the Las Vegas Strip; the Sands Expo and Convention Center in Las Vegas, Nevada; and the Sands Casino Resort Bethlehem in Bethlehem, Pennsylvania. The company's integrated resorts comprise accommodations, gaming, entertainment and retail facilities, convention and exhibition facilities, celebrity chef restaurants, and other amenities. Las Vegas Sands Corp. was founded in 1988 and is based in Las Vegas, Nevada.

The company has been greatly punished during the last couple of months for missing revenue estimates last quarter and being hit by several target price downgrades (which are at the bottom of this article, if you're in a hurry).

Revenue Stream

As you can see on the next picture, 83.1% of the company's revenues come from Casino income, so even though the rooms represent only 10.3% of its revenues, the higher the occupancy rate at the properties, the higher the Casino revenues will tend to be, ceteris paribus.

Margins

There's good news and bad news: The company's EBITDA margin has decreased 1.4% in the The Venetian Macao, which represents 28.5% of the company's revenues. The good news is that it has been offset with the increase in EBITDA margin in Marina Bay Sands, which even though it "only" represents 22.2% of the company's revenues, a 2.8% increase year over year is nothing to scoff at. Since it started operating, the company has had pretty healthy and stable margins.

Click to enlarge

Parisian Macao to be open in late 2015

In Macao, the company is constructing The Parisian Macao, which includes a half-scale replica of the Eiffel Tower for some reason. The property will include a gaming area with around 450 table games, 2,500 slots, hotel with more than 3,000 rooms and a shopping mall. The integrated resort will be connected to the Venetian Macao and Four Seasons Macao. Who better to cannibalize your market than yourself?

Let's do some quick calculations: With 450 table games, the closest property it has to that is the Sands Cotai (which will be literally across the street from the Sands Cotai) could add from around $2 billion-$3 billion in revenues starting in 2016, so I will be using those numbers for my valuation later. At the current 20-25% FCF margin, this means an additional $400 million-750 million additional FCF per year.

Growth

During the six months ended June 30, 2014 against the six months ended June 2013, Net Revenues increased by 16.6%, provided mainly by the Venetian Macao and the Sans Cotai Central properties.

From the Company's 2013 10-k:

"Macao is the largest gaming market in the world and the only market in China to offer legalized casino gaming. According to Macao government statistics, annual gaming revenues reached $45.3 billion in 2013, an 18.5% increase over 2012."

This means a market share of around 17.6% in the Macao market, considering the company's revenues in Macao in 2013 of $7.97 billion (from the company's 10-k) and the Macao government statistics taken from the same filing.

"We believe that Macao will continue to experience meaningful growth in both gaming and non-gaming revenues and the record 29.3 million visitors Macao welcomed in 2013 will continue to increase. We believe this growth will result from a variety of factors, including the movement of Chinese citizens to urban centers in China, the introduction of new transportation infrastructure and the coming increase in hotel room inventory.

Table games are the dominant form of gaming in Asia, with baccarat being the most popular game. With the increase in the mass gaming market, we have seen a significant increase in slot machine play and expect this business to continue to grow in Macao. We intend to continue to introduce more modern and popular products that appeal to the Asian marketplace and believe that our high-quality gaming product has enabled us to capture a meaningful share of the overall Macao gaming market, including the VIP player segment."

Operating Data Breakdown

The elevated occupancy rate at almost all locations, especially now that the Sands Cotai has improved to decent occupancy levels, helped boost the company's revenues and cash flows.

Room Stats

Average daily rate (ADR), Revenue per Available Room (RevPAR) and Occupancy have all increased, as you can see in the next graph, taken from the company's latest earnings report:

Casino Stats

As you could have imagined from seeing the big jump in occupancy, the biggest increase in Casino Income (all figures will be of the first six months of 2014, year over year comparison) came from the Sands Cotai property.

The Casino revenues (which are 83% of the company's earnings) are divided into two parts of the revenue equation, which is the engine that drives the company's revenue and ultimately, its free cash flow and intrinsic value: a) The Tables games win per unit per day and b) the Average Number of Table Games.

  1. Table Games Win per unit per day

The summary is as follows:

Source: Author, with data from the company's latest 10-Q

The U.S. properties are decreasing their gaming revenues, but as they represent only 18.6% of the company's daily table game win per unit per day, I would not be overly concerned as long as the cash cows in Asia keep the cash flow rolling in, especially the Marina Bay Sands, with above 99% occupancy rate.

Average Number of Table Games

Another very important thing to keep an eye on is the average number of table games, which has been more stable for the U.S. properties, but with fewer table games win per unit per day, another potential red flag could be the drop in the average number of table games in Four Seasons Hotel Macao, Sands Cotai Central and The Venetian Macao.

This drop in average number of table games, of course, is offset with the increase in table games win per unit per day, so even with fewer average table games; the company has been able to increase its revenues. Keep a close eye on the next report for both of these key stats.

You can see the details in the following graph:

Source: Author, with data from the company's latest 10-Q

Competitors

Macao

The Macao market is heavily sought-after, especially seeing the high levels of growth in gambling revenue coming from that area. Wynn Resorts (NASDAQ:WYNN) was granted a concession by the Macao government to construct a full-scale integrated resort in Cotai, which will be located behind the City of Dreams and is expected to open in early 2016.

Galaxy Casino Company Limited will expand its Galaxy Macau property in Cotai to include an additional 1,300 hotel rooms, and is expected to be completed in 2015.

MGM (NYSE:MGM) Grand Paradise Limited, a joint venture between MGM and Pansy Ho Chiu-King, which received a government concession in October 2012 to develop an integrated resort on an 18-acre site located behind Sands Cotai Central.

Singapore

There are currently only two government-approved operators, of which this company is one. The CRA is required to ensure that there will be no more than two casino licenses during a ten-year exclusive period, which began on March 1, 2007.

Resorts World Sentosa began its operations on January 20, 2010 and is primarily a family tourist destination. The resort includes six hotels, a Universal Studios theme park, the Marine Life Park, the Maritime Experiential Museum & Aquarium, restaurants and retail shops.

So there will be no incoming competitors until March 1, 2017, time by which the Parisian Macao should have been operating for over a year.

Taxes

The company is not required to pay corporate income taxes on its casino gaming operations in Macao. This tax exemption expires in 2018. More cash flow for investors. Thank you, Macao government.

In Singapore

"There is a goods and services tax of 7% imposed on gross gaming revenue and a casino tax of 15% imposed on the gross gaming revenue from the casino after reduction for the amount of goods and services tax, except in the case of gaming by premium players, in which case a casino tax of 5% is imposed on the gross gaming revenue generated from such players after reduction for the amount of the goods and services tax. The tax rates will not be changed for a period of 15 years from March 1, 2007. The casino tax is deductible against the Singapore corporate taxable income of MBS".

The effective tax rate for the company is in the single digits and falling, from 8.8% in 2012, 6.0% in 2013 and 5.3% in the trailing twelve months. Asian taxes are a lot cheaper than U.S., and every dollar not paid in taxes is another dollar that the company keeps as cash flow and can use to repurchase shares and pay dividends.

Valuation

For this valuation, I will use several techniques, including the Graham Formula, the DCF valuation, reverse DCF valuation, EBITDA multiples and EPV to get an estimate of the range of intrinsic values that the company can have, depending on how Mr. Market feels the company will do in the future.

Graham Formula

Using Graham's formula with an EPS of $3.73 for 2014, we can derive that the market is expecting the company to deliver EPS growth of around 11% per year. EPS growth was 48.4% for 2013, and is now slowing down to 15.8% for the twelve trailing months (TTM).

Here is what the price per share would look like with the following EPS and growth rates:

DCF Valuation

As always, I will use a 10% discount rate, you can use your own.

For 2013, CAPEX totaled $898.1 million, including $614.4 million for construction and development activities in Macao, consisting primarily of $262.5 million for Sands Cotai Central and $212.8 million for the Parisian Macao, $142.7 million in Singapore, $93.2 million at the Las Vegas properties and $47.8 million for corporate and other activities. Additionally, $44.9 million were paid to renew the Singapore gaming license.

The CAPEX that the company will incur will decrease as the construction of the Parisian Macao ends, so I will use, as usual, 3 scenarios for my DCF Valuation. The company expects the total cost to design, develop and construct the Parisian Macao to be about $2.7 billion, of which $376 million have been capitalized already.

  1. Business as Usual: The company maintains its margins at current levels and including the $2.324 billion left in CAPEX to be spent during the next 30 months. After that, it levels out around $1 billion in CAPEX per year and around $6 billion-6.5 billion in Operating Cash Flows, leaving $5.5 billion-6 billion in FCF after the Parisian Macao is operating in 2016.

Fair Value per share: $82.

  1. Optimistic Scenario: Margins are improved to how they were during the first semester of 2014.The CAPEX is still around $900 billion-$1.1 billion, but the Operating Cash flows grow faster than expected, at a 15% growth rate each year. The $7 billion barrier FCF is crossed after 2018, when the Parisian Macao, along with the company's other properties continue to dominate the Macao gaming market. Other competitors fail to get their room occupancy above 80%, as this company has the first-entry advantage in the customer's top-of-mind.

Fair value per share: $92.

  1. Pessimistic Scenario: The Asian gaming markets slow down even more, including the mass and VIP segments, depressing the FCF margins to around 15%-18%, derived from a slowdown in FCF growth and increased competition, along with increasing CAPEX to almost $1.5 billion a year because of construction delays and unforeseen costs to build the Parisian Macao. FCF growth slows down to 8% a year. Operating Cash Flow only reaches $5 billion-5.5 billion each year (the TTM Operating cash flow is $4.8 billion) after 2017 when the Parisian Macao is open, leaving only $3.5 billion-4 billion in FCF.

Fair value per share: $56

Decide which scenario is most likely to play out. I will stick with the "Business as Usual" scenario and give this stock a DCF target price of $82.

Reverse DCF Valuation

This is done to see what the market is expecting the company to earn in Free Cash Flow and the growth it will have in the future.

For the company to be worth $68, its FCF growth would have to be around 8.8%, making the yearly FCF for the next 4 years stay below $5 billion each year, and then keep growing the FCF at single digit rates, even after the completion of the Parisian Macao. It is either implying it will be not completed in time, be a total failure or completely cannibalize the other properties' revenues.

EBIT Multiples

I will also use 3 scenarios for the EBITDA Multiples, depending on the levels of growth and EBIT margins that the company can sustain. I will use current revenues ($14.859 billion for the twelve trailing months) for all calculations. The company has traded in EBIT multiples of 13 to 90 for the past 5 years, with 16.78 being the median. It currently trades at 13.3. TTM operating margins have been 33.5% (and are improving). As the fixed costs are covered in each property, each dollar in revenue goes straight to the bottom line, strengthening margins.

This valuation model takes revenue, multiplies it by an operating margin, and then multiplies the result by an EBIT multiple. This method, like the DCF valuation, adds back cash and subtracts all debt to derive a fair value of equity.

  1. Conservative: Using an operating margin of only 30.5% and using an EBIT multiple of 12, the lowest in the company's history, the implied value per share would be $59.
  1. Normal: Using an operating margin of 32.5% and 15 times EBIT multiple, the fair value per share in this scenario would be $81.
  1. Aggressive: Using an operating margin of 33.5% and an EBIT multiple of 18 times, the fair value per share would be $102.

I would be a buyer under the "normal" scenario, and buy more shares as the "conservative" scenario price approaches. Sell as the Aggressive scenario's target price approaches.

Share repurchases, inside ownership and dividends

As an investor, I want to see that the executives that run the company are committed to its future by owning shares. The company currently has a 18% inside ownership by the current executive officers and directors. This might mean that they are committed to the company, but most importantly for the investor, that they want to see the shares increase in value. During 2013, the company returned over $1.7 billion in cash to shareholders in the form of dividends and stock repurchases.

1. The share repurchase program:

  • $320 million through share repurchases. (4.2 million shares at a weighted average price of $76.56) during the quarter ended June 30, 2014.
  • As of December 31, 2013, approximately $1.43 billion of shares remained available for repurchase.

2. The dividend increase: The company announced in its 2013 annual report that it will increase its dividend payment to $2.00 per common share for 2014.

During the latest quarter, the company returned $723.3 million to shareholders:

  • $403.3 million ($0.50 per share) through dividend payments (plus the $320 million share repurchase program).
  • For 2013, the payout ratio was 50%, as $2.80 was the EPS and the dividends declared per common share were $1.40. You can see the positive implications for shareholders regarding the dividend increases if this payout ratio continues.

This company seems very interested in continuing to increase their dividend and keep repurchasing shares, both great catalysts to increase share price by reducing outstanding shares and paying an increasing dividend. Its current dividend yield as of August 17th, 2014 was 2.92%.

This kind of yield is matched by only by companies growing at low single-digit rates, so the buying opportunity will, of course, be gone fast as investors realize that not only is the dividend yield attractive by itself, but the capital gains derived from having the directors of the company repurchasing shares for "at least $75 million dollars of stock each month, special dividends and a commitment to grow dividend by at least 10% annually."

The company still has around $450 million remaining on its repurchase authorization, which at this price would represent around 6.5 million shares.

Price Action

As you can see from the weekly chart (courtesy of stockcharts.com), the stock has risen a few weeks after heavy selling (institutional, most probably) has taken place. Then the buyers step in and take the stock back up to new highs. And while I am not a very big fan of technical analysis, I know it is a self-fulfilling prophecy, because most investors, especially traders, use it to time their purchases and sales. The yellow count clearly shows where the 5th Elliot Wave might end taking the stock price. This, as I said before, is better left to chartists; but when fundamental analysis and technical analysis line up, I know it is time to act (go long in this case).

Click to enlarge

Source: Author, courtesy of Stockcharts.com

Conclusion

I do think this stock is undervalued by about 19% and its intrinsic value is $82, and I will be long via options and stocks for me and my clients.

This is a great time to purchase shares of this company, as its price is below its intrinsic value. Once the price is well above the intrinsic value range, there will be a decision to keep the stock to continue getting the dividend payments or sell the shares at a profit and look for bigger capital gain opportunities elsewhere. A cash cow with great growth potential that pays almost a 3% dividend? To me, buying at these prices is a no-brainer.

So there you have it, the buy zone is below the $75 per share area, and I would be a seller once the stock crosses over $90.

As a reference, Bank of America (NYSE:BAC) has an $88 target price for this stock, which was lowered from $95 because of the slowdown in Macao gaming growth.

Deutsche Bank has a Buy rating with a price target of $88.

Wells Fargo maintained an Outperform rating and lowered its price target to $80-85.

In the next weeks I hope to have ready the analysis of another undervalued company I found. (They're getting harder and harder to find!) Feel free to ask for company valuations -- use the comment section below.

Invest wisely, and cheers.

Disclosure: The author is long LVS.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Via stocks and options.