Can James Packer's Bye-Bye Signal A Hello To Melco Crown At $14?

| About: Melco Resorts (MLCO)
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Summary

By separating his Macau assets from his Australian portfolio, Packer has set the stage for clarity on valuing Melco as a purer Macau play.

Capacity expansion in Macau nearing completion could settle uncertainties about saturation by A4. MGM delayed again.

MPEL's up 5% in Q1 and considering a VIP junket move for Studio City.

"Do you think I stop gambling when I leave the damn tables?"

- Kerry Packer, father of James, to the author in 1986.

During one wee-hours-chat in 1986 when I was a senior executive at Caesars (NASDAQ:CZR), I sat in our otherwise deserted lounge with the legendary whale of high rolling whales, Australian media magnate Kerry Packer (1937-2005), father of the current chairman of Crown Resorts Ltd. (OTCPK:CWLDF). He was a man holding forth with strong views on the world at large that particular night. He was venting loudly about the caprices of the younger generation. His son James, the future chairman of Crown Resorts, was then 18 or 19 and according to Kerry, was zipping around Asia partying. But he remained philosophical. "No worry, Jamie will be fine, he gets it. Whether the table is a baccarat game or a conference table in a boardroom, it all comes down to the play. Life's all a play."

James Packer appeared to have absorbed his father's mantra those many decades ago.

True to that forecast, last week Crown Resorts' Chairman announced that the company would spin off all its international interests into a separate company and hold onto his core Australian assets with a value of A$4.7 billion.

The spin-off was widely viewed as a move for Packer to insulate his profitable Down Under holdings from the current headwinds and challenges of the Macau gaming market, as well as other uncertainties connected to his property holdings in Las Vegas, the Nobu restaurant chain and the Asper's casino in London. Moody's quickly followed up, expressing its concern that Crown's debt rating, given the diminished asset base and its consequent impact on the parent's ability to meet its obligations, had to be re-evaluated.

Other responses in the financial community were more muted, some suggesting the spin-off would have little or no direct effect positive or negative on its Macau operations, Melco Crown Entertainment (MPEL). Shares of MPEL wiggled and jiggled a bit but mostly remained at around $13 to $14 and change as of this writing. Its 52-week trading range is $12.05 to $24.00.

The consensus opinion was that MPEL would on its own continue to rise or fall as other Macau heavy stocks would, based on the prospects of that battered but slowly stabilizing market. We agree with that assessment but add that MPEL's spin-off could well augur a strong positive for the shares of the new entity going forward. Our rationale mainly springs from the enhanced clarity the spin-off will produce for the shares. Shed of its Australian assets, the company becomes much more of a clear play on Macau. It could possibly set up the real possibility of further clarity if the new entity opts to in turn, sell off its long-delayed Alon Vegas strip project or further spin off Nobu, its chain of 33 Japanese restaurants.

These assets could provide the capital base Melco could use to reduce its debt, enhance its Macau properties when recovery begins in earnest there. The Alon Las Vegas strip property, a 35-acre parcel on the old grounds of the New Frontier, has been stalled due to lack of financing the $1 billion needed to get the project rolling. Though there are positives in yoy visitation in Vegas several years in a row (43 million and counting), it would also appear some junk bond issuers are beginning to have doubts about saturation and absorption there. They've not stepped up to the plate on Alon yet and there is no indication given the growing shakiness of the junk bond market that anyone will step forward soon.

Genting's Resorts World property is moving ahead, albeit slowly. Renovations to existing properties continue unabated.

Steve Wynn's announced Paradise Park outdoor recreation project will stir much reconsideration about what will work in the Vegas of 2020 and afterward. And as always, the brooding specter of a possible economic downdraft in the US next year looms. Yet MGM, the town's biggest operator, has told analysts its forward projected earnings include the belief that new supply on a large scale beyond what is already known, is not expected in Vegas. That's another way of saying that the town understands it will need time to absorb what they know is coming, but not so much that it would include more mega-projects.

The Alon property at this time may make more sense for a 2022 to 2025 deep-pocketed developer, than it does at the moment for the spun-off Melco Crown. It's a strong location that needs time or money, neither of which in Las Vegas makes sense as a priority for the new company.

The Nobu restaurant chain likewise is a valuable 33-property unit which unto itself has great stand-alone clarity for an investor in that space, either a straight hotel or restaurant operator for whom the global propulsion of lighter, healthier Asian type cuisine makes great sense - at a price. Does it belong as part of a gaming company? That's an issue for the spun-off company to conjure.

The company's Asper's London is a stable performer in that market and likewise in our view, presents an opportunity to sell it off and use the capital to finance Melco expansion in Asia. Other Asia heavy operators in the sector have not fared badly over time. Wynn (NASDAQ:WYNN) remains 69% Macau dependent along with Las Vegas Sands (NYSE:LVS). Both companies are open to futures in other countries in Asia as well, despite their footprints in the US.

Shorn of these three entities, Melco Crown becomes an Asian casino play, sink or swim. The likelihood is greater for swim than sink when you apprise the company's prospects going forward. The stock becomes much easier to understand at its price range. Right now, despite its strong presence in Macau it's cheaper than any peer there and just as dependent on the possibility of recovery.

Price at writing: $14.00

52-week range: $12.05-$24.00

Next earnings release: Est. Aug. 4 to 8th.

Market cap: $7.70b.

P/E: 91.60

EPSL: 0.16

Q1 revenue: $1.03 billion, up 5% due to Studio City opening.

Q1 EBITDA: $249 million, down 2% yoy.

Properties: City of Dreams, Altira, Mocha Club, Studio City and City of Dreams Manila.

A hint at VIP Room possibility

Melco Chairman Ho in a statement to reporters hinted that the company was considering whether to open VIP rooms at Studio City, as a continuing part of its aggressive strategy to add new ideas in marketing and amenities to their product. Just how seriously this possibility is to becoming reality is hard to say. We've talked to our industry sources there, one of whom suggested it could be in anticipation of the new Wynn and LVS projects imminently getting ready to open in Cotai. "The idea is growing that the Cotai area will become something more of a ground zero destination for VIP and premium mass play as against the pure mass of Macau's other center. I know for sure that Wynn believes that to be the case," our source said. "And if it is, Chairman Ho's remark may not just be as off the cuff as would first appear. I mean the guy is up to trying anything. And if VIP clusters heavier at the Cotai as many think, it makes great sense for Melco to join the fray and participate in that segment, as challenged as it continues to be."

Our call on Melco Crown post spin-off

Like every other operator on Macau, Melco's future rests almost entirely on the stabilizing and consequent recovery of that market's revenue mojo. We'll shortly have the GGR numbers for June, which analysts have called to come in anywhere between a -7% yoy, to a flat to +2% yoy. This range, not exactly sunshine and flowers either way, needs the perspective of conviction that the precipitous slides since the disaster of 2015 continues to narrow. Clearly, the closer the numbers come in to low single-digit declines or flat, the better it will be for Melco and all other major Macau players' shares. The gushing of blood is over. We're already down to a steady, but not catastrophic drip down. At the first sight that we're down to a trickle, which is what a good June number will signal, we believe we'll see a strong upside tick in Melco shares.

With its peers all trading at much higher prices, the prospect of the spin-off bringing better clarity to its earnings and the increased flexibility management will have in seriously considering unloading its non-Asian assets, we like the company stock at $14.

Consensus target: $17.99

Our target:

1. Assumes a continuing narrowing of yoy revenue declines.

2. Assumes Melco's management will continue to be actively trying new initiatives to compensate for the general market downdraft, including jumping into the competition with a VIP effort at Studio City.

3. Assumes that the future of the Alon Las Vegas Strip project will be resolved either by a sale or successful financing.

James Packer remains a key holder in the new entity as well; yet, from his decision to separate his solid Australian assets from the greater vagaries of his global interests, we see the writing on the wall: there's more to come at Melco. And in our view it will be positive for the Melco Crown Entertainment business.

Our call is for $20 by Q4 of this year.

Flying back to Manhattan in our helicopter with Kerry Packer after that evening's play (he'd lost close to $1.5 million), I recall him turning to me saying, "I really wanted to kick you guys ass tonight, but we'll be back for another shot," he joked. As usual he paid his markers on the dot, we bought him a Rolls Royce to mitigate the passing discomfort. Some years later he was part of the high rolling customer base when MGM Grand opened in Vegas with Barbra Streisand in December of 1993.

A former Caesars colleague of mine was CEO at the time. I'd bumped into him not long after during a business trip to Vegas and learned that Kerry Packer had come for the gala grand opening and beat the property for well over $15 million.

Staying in the game win or loss, it appears is in the Packer genes.

About the author: Howard Jay Klein is a 25+year c-level executive of the casino industry and presently a consultant to companies in that sector. He is the author of Mastering the Art of Casino Management and the Publisher of The House Edge, the premium marketplace site on Seeking Alpha.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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.