Las Vegas Sands: Stagnant Macau Means Stagnant Share Price

| About: Las Vegas (LVS)

Summary

Singapore results were weak, primarily due to bad house luck for the quarter. However, adjusting for luck indicates that Singapore was quite solid.

Macau continues to show no signs of a sustained recovery.

A Parisian launch should give Las Vegas Sands a bit of a boost, increasing its market share and EBITDA even if it doesn't help grow the Macau market.

The company appears fairly valued for a stagnant Macau. Dividend growth is probably achievable for a while, although it will increase its net debt modestly.

Las Vegas Sands needs a catalyst, such as a Macau recovery, a strong Parisian launch or a Singapore mall sale for top dollar.

Las Vegas Sands (NYSE:LVS) recently reported Q1 2016 earnings that appeared a bit disappointing. However, much of that was due to a combination of bad house luck at its Marina Bay Sands property in Singapore as well as the impact of a strong US dollar. If you factor those items out, Singapore did well for Las Vegas Sands in Q1 2016. On the other hand, Macau hasn't shown distinct signs of recovery yet, and has been stuck going sideways since mid-2015.

Hold Impact In Singapore

Marina Bay Sands had particularly poor luck in Q1 2016, with actual property EBITDA falling to $247.9 million from $415.3 million in Q1 2015. However, hold-normalized property EBITDA actually showed a slight increase, going from $371.3 million in Q1 2015 to $382.8 million in Q1 2016. The past history at Marina Bay Sands indicates that the Q1 2016 hold-normalized figure was pretty solid, and that actual EBITDA can temporarily vary significantly from hold-normalized EBITDA but tends to be fairly close (in percentage terms) over an extended period of time.

$ Million

Q3 2013

Q4 2013

Q1 2014

Q2 2014

Q3 2014

Q4 2014

Q1 2015

Q2 2015

Q3 2015

Q4 2015

Q1 2016

Actual EBITDA

$373.6

$258.8

$435.2

$417.8

$351.7

$428.4

$415.3

$363.3

$389.7

$338.2

$274.9

Hold-Normalized EBITDA

$373.6

$341.3

$377.9

$368.5

$366.5

$370.9

$371.3

$363.3

$411.3

$374.8

$382.8

Click to enlarge

As noted in a UNLV report, Baccarat (which is the most lucrative table game) often has significant variations in hold percentages, and has the greatest variation in hold percentage among the games studied. Therefore, the low actual property EBITDA from Marina Bay Sands is not something to be concerned about. Sometimes there is good luck for the house and sometimes there is bad luck, and each quarter is independent of other quarters.

Macau: Not Getting Better Or Worse

In general, the situation in Macau appears stable, with some stronger periods intermixed with some weaker periods. There has been no solid indication of a sustained move in either direction, though, and it has been like this since mid-2015.

Las Vegas Sands should benefit from the opening of the Parisian Macau, although it may take a while to ramp up. Galaxy Macau Phase II appears to have increased Galaxy's EBITDA by approximately $15 million USD in Q3 2015 and $40 million USD in Q4 2015 (assuming that EBITDA would have been flat versus Q2 2015 levels otherwise).

I think the Parisian Macau should be able to do better than Galaxy Macau Phase II in terms of post-launch performance. Even if the Parisian's early performance is fairly tepid, though, cost-cutting combined with the extra EBITDA from the Parisian should allow Las Vegas Sands to reach my previous Macau target of $2.44 billion USD in adjusted property EBITDA in 2017. This assumes Macau remains at least stable in 2017.

Valuation

I think the previous valuation analysis that I did in September 2015 still holds true, as not much has changed since then in terms of the performance of the various markets that the company is in. At the time, I mentioned that Las Vegas Sands was worth approximately $46-47 based on a 12.5x EV/forward EBITDA multiple, in line with historical Macau casino averages. It does have slightly increased net debt since then, so I would amend that valuation to $45-46. The previous valuation analysis was based on a slight recovery in Macau gross gaming revenue to approximately 19.5 billion MOP per month, or $2.44 billion USD per month. With the additional cost-cutting measures that Las Vegas Sands is implementing, it can probably get to that same EBITDA if Macau averages the same monthly rate as Q1 2016 (18.7 billion MOP per month, or $2.34 billion USD per month) over a full year.

I would say the company becomes a relative bargain at $39, which is an 11x EV/forward EBITDA multiple. The upper bound is approximately $52, which is a 14x EV/forward EBITDA multiple.

Conclusion

Las Vegas Sands appears fairly valued right now for its current situation. Potential positive catalysts include actual signs of sustained improvement in Macau, a strong Parisian launch and a possible 2017 sale of its Marina Bay Sands retail mall. Until one of those items happens, the stock may be stuck in the $40s, though.

Las Vegas Sands may have a modest increase in its net debt if Macau doesn't improve and it wants to keep increasing its dividend by 10+% per year. A flat Macau through 2018 probably results in the company's net debt getting to around $8.5 billion to $9 billion at that time, if dividends keep increasing. The increasing dividend is expected to be largely offset by declining capital expenditures during the next few years. A 10-15% increase in the adjusted property EBITDA for Sands Macau would probably be enough to cover the increased dividend in 2017 or 2018.

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Disclosure: I am/we are long LVS.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.