Las Vegas Sands (LVS) has the best record in the casino industry of opening successful integrated resorts in a variety of geographic regions that generate high margins and returns on invested capital. LVS is positioned to benefit from strong growth in the fundamentally attractive Asia gaming market; it derives about 85% of its revenue from the region. Sands possesses a strong economic moat as it possesses one of only two casino licenses in Singapore and one of six licenses in China. The company is focused on mass market customers in Asia, a market that has higher margins, lower volatility in results, and better growth prospects than the VIP market. Sands warrants a high uncertainty rating, as its VIP business is sensitive to economic conditions in Asia and its Vegas Strip operations are cyclical.
Potential Increases in Dividend Payout: Given the company's deleveraging and balance sheet restructuring efforts in recent years, LVS is in a very strong position. In addition, strong free cash flow gives the company options to continue funding its pipeline and other potential opportunities (Japan, Massachusetts, Spain, Vietnam). LVS has transitioned somewhat to a return of capital story as the company has implemented a $1 per share annualized dividend to be paid quarterly. Given the recent share price, LVS yields a modest 1.8%. LVS' annual dividend will cost the company $731m and equates to a 38%/32% payout ratio on our 2012/2013 estimates. While investors see LVS remaining a development-driven organization, assuming new opportunities are more limited near-term, and there is ample room to increase the payout. In addition, a sale of non-core assets such as its retail facilities would increase the opportunity for a special dividend.
Unlocking Value from Retail Portfolio: LVS will look to monetize its portfolio of retail malls (1.6m sqf in aggregate) at Venetian Macao, Four Seasons Macao, and Marina Bay Sands. Note that LVS has historically spun out its retail real estate as evidenced by the sales of its facilities in Las Vegas. The company's decision in 4Q11 to begin disclosing detailed retail metrics was a potential indicator of this strategy and also should help investors/analysts to better assess the value "hidden" in the portfolio.
Opportunity for Share Gains in Singapore: Marina Bay Sands could continue to gain share versus Resorts World Sentosa. This was reflected in Genting Malaysia's somewhat disappointing 4Q11 results, as the property only grew its top line 4%, which compares to 4Q11 top line growth of 44% at MBS. MBS continues to mature and the opening of an MRT stop directly into the property in early 2012 should continue to benefit the property's mass market business.
New Junkets Continuing to Ramp in Macau: LVS remains focused on ramping up its new junket relationships and related facilities, which came into place on Cotai near year-end 2011. Throughout 2012-13, LVS should continue to improve its share in VIP, particularly at Four Seasons and Venetian. Based on early year results and according to Gabriel Chan, these amenities are ramping and initial traction with new junket relationships has been strong.
Trends Remain Strong in Macau: According to DICJ, Macau's gross gaming revenue (GGR) increased by 22.3% YoY in February to MOP24.3bn (US$3.0bn), which was inline with recent expectations. January and February combined (in order to smooth out the timing difference of Chinese New Year) showed GGR growth of 28.3% YoY, stronger than the 25% YoY increase recorded in December 2011.
These results demonstrate that even against challenging comparisons, Macau remains healthy. The mass market, a segment in which LVS has significant distribution, is also strong and growing roughly 30% YoY. Given that LVS will be the only operator adding gaming supply to this segment in 2012, as well as other non-gaming elements, this should bode well.
On the Short List if Integrated Casino in Japan: Resorts Are Approved in Japan As widely reported in the media, there has been renewed momentum to legalize gaming in Japan, as a group of 150 lawmakers from the ruling party and five opposition parties, have embraced legislation. While there have been many fits and starts on this path, leaders of the group could submit a gaming bill before the current parliamentary session ends in June 2012. Japan will be a very deep market and one of the last untapped massive opportunities left in the world, particularly in a significant mature economy.
In addition to the requirement of a strong balance sheet and local partners, deciding bodies will be looking for a track record in developing integrated resorts. Given LVS' forte with the Cotai Strip as well as MBS, the company should fit this bill, arguably better than any other gaming operator industry-wide. As momentum builds on this legislation throughout 2012 we would expect LVS shares to rally on a corresponding basis. Keep in mind, that Japan, particularly a site in the Tokyo area, will be a beauty contest and we would anticipate price tags similar to MBS or higher (at least a $5bn-$10bn commitment). While WYNN has sullied its chances in Japan due to the Okada fallout, LVS will likely be viewed as a favorite for a gaming license in this market.
I feel LVS as significantly undervalued, with the company trading at about 16 times next year's earnings--a cheap multiple, for a company we expect to increase earnings per share at a 30%-plus compound annual rate for the next five years.
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* USD Mn