- Las Vegas Sands is leaving Las Vegas and it's a good move.
- The sale will allow the company to focus on its fastest-growing business segments.
- While the uncertainty is lower, and the direction is good, I am still uncomfortable with investing in the company right now.
Almost six months ago, I explained why I am not buying Las Vegas Sands (NYSE:LVS) just yet. The return potential back in November was extremely high, yet the risks were high as well. Las Vegas Sands was a highly leveraged company, with declining revenues, and there was still no timeframe for the vaccination across the world. The company has eliminated its dividend, withdrew its outlook, and it seemed like it doesn't matter how well the company is run, it will have to deal with this black swan.
As an investor, I am scared of uncertainty, and I understand that on many occasions, I will let go of potential returns to invest in less risky investments. However, as we see the business environment in the world, we see a decline in the level of uncertainty, and some optimism, as the IMF projects that China, Las Vegas Sands main market, will grow 8.1% in 2021.
I followed Las Vegas Sands as I used to own it for years, and waited for the uncertainty level to decrease, which will allow the company to reinstate its dividend, and the business to return to its usual operation. Sheldon Adelson passed away and forced a change in leadership during this already challenging time for the company, but as the vaccines are distributed, traveling will grow and Las Vegas Sands will have a better business environment.
Another uncertainty was its business plan. The company was well diversified across the United States, Singapore, and China. The business in China was booming and growing very fast up until Covid hit, its Las Vegas business reached an all-time high EBITDA in 2019, which was still only 10% of the entire business.
The company has announced that it's focusing on its Asian business as it sold its Las Vegas properties as announced on March 3rd, 2021. The company will receive $6.25 billion which will join its balance sheet that already has $2 billion in cash and equivalents. The company is also selling the entire subsidiaries that own the Las Vegas properties, thus lowering its financial debt in this transaction.
According to Seeking Alpha company overview, Las Vegas Sands develops, owns, and operates integrated resorts in Asia. It owns and operates The Venetian Macao Resort Hotel, the Sands Cotai Central, The Parisian Macao, The Plaza Macao, and Four Seasons Hotel Macao, Cotai Strip, and the Sands Macao in Macao, the People's Republic of China, and iconic Marina Bay Sands in Singapore. Its integrated resorts include accommodations, gaming, entertainment and retail, convention and exhibition facilities, celebrity chef restaurants, and other amenities.
The challenges for Las Vegas Sands
The first challenge is the level of uncertainty regarding Adelson passing away, the coronavirus, and the unclear business plan. The past six months have seen a lower uncertainty level. The company now has a new CEO, its business environment is improving, and we are starting to see the new business plan which is focusing on Asia while maintaining the flexibility to invest in the United State as its CEO described in the sale announcement.
This company is focused on growth, and we see meaningful opportunities on a variety of fronts. Asia remains the backbone of this company and our 1 developments in Macao and Singapore are the center of our attention. We will always look for ways to reinvest in our properties and those communities. There are also potential development opportunities domestically, where we believe significant capital investment will provide a substantial benefit to those jurisdictions while also producing very strong returns for the company.
Spending is still low in the United States, and I assume the same outside of it. In the United States, the public has saved almost $3 trillion. When people around the globe feel better about traveling and more secure when it comes to spending money, leisure businesses like Las Vegas Sands will benefit the most from it. Therefore, I believe that this challenge is temporary, and when it fades, there will be a spending boom.
The third challenge is capital allocation after the sale. While the first two challenges are fading away, the current challenge will decide how Las Vegas Sand will look like. We already know that Asia is the focus, but we're still unsure about specific investments, and what part if any will be returned to shareholders in the form of dividends and buybacks.
Selling Las Vegas is a smart move
The company is selling roughly 10% of its EBITDA for 12.5 of its current market cap. Even when I take into account the all-time high market cap back in mid-2018 this is 10.5% of the market cap. The company will now have plenty of cash to focus on its main growth prospects.
While the company always treated its Las Vegas properties as legacy properties with plenty of growth opportunities, it never tried to hide the fact that the business focus is in Asia where growth is faster. I believe that while diversification is important, as the American assets were only 10% of EBITDA, it makes perfect sense to sell them and focus on Asis, and maybe have another attempt at a large project in Japan similar to the one that was considered previously.
The company is well aware of the opportunities in Asia, and its current footprint there is already significant. Therefore it is well-positioned to keep developing and expanding new and current projects. The company is used to the challenges of doing business in a non-democratic country, and what may be a challenge for other competitors, is something that Las Vegas Sands is used to, and knows how to deal with.
What to do with $6.25 billion
The money will be used according to the company's business, yet this is a very vague statement. There is still no capital allocation plan for this cash infusion here. However, the COO did imply what will be deployed for improving existing properties and returning some of the cash directly to the shareholders.
"Our long-held strategy of reinvesting in our Asian operations and returning capital to our shareholders will be enhanced through this transaction. Additionally, as our industry continues to evolve, particularly as it relates to the digital marketplace, we are committed to exploring those possibilities,"
The first use of cash might be a special dividend, yet that depends on the political climate. In 2012 when the Obama administration together with Congress raised taxes on the wealthy, Las Vegas Sands paid a massive special dividend of $2.75 which accounted for almost three times its regular annual dividend. If another tax hike is coming, as Biden said he'll increase taxes, I think we might see another special dividend.
Another possible use of cash is for buybacks. The company's EPS and EBITDA per share will decrease through the transaction. Reducing the number of shares outstanding can be a good move to limit the effect of the EPS decline. However, as the company trades for 23 times its 2022 earnings, this may not be the best timing.
Another option that the management is considering is investing in properties in Asia. While the uncertainty is still with us, a good way to be able to invest in these assets is by improving the flexibility of the balance sheet. The company will see its long-term debt declining as the debt associated with the Las Vegas properties was sold as well. Yet, additional payments will help to lower the $14 billion in long-term debt, lower interest expense, and allow the company access to even cheaper capital in the future for new projects.
What still needed
I believe that the next phase to unlock value to shareholders is a clear capital allocation plan. The company is back on track as the economy is recovering, and with the cash from the sale, that will join the cash on hand, there is a need for a thorough capital allocation plan. I do believe that eventually, the company will combine several of the measures I described above, mainly debt reduction and buybacks.
In addition to the company's allocation of the cash, investors will also require an updated vision, a growth plan for the future. There is new management, there is increased focus on Asia, and a massive deal that cements this focus. Now, it's the management's turn to offer a growth path for the coming 3 to 5 years. Whether there will be new projects in China or entering a new market in Asia, a vision by the new management is needed.
Las Vegas Sands is a much safer company now. The company sees its business environment improving, has plenty of cash on hand to invest, and is waiting for people to enjoy travel and leisure again. There are still significant challenges ahead, but its sale of the Las Vegas properties is a very good move in my opinion.
On the other hand, I am still not confident in investing in the company. The company is valued closer to a growth stock at 23 times 2022 earnings. While the company with smart capital allocation can achieve this goal, it is still a risky investment and one I am not comfortable with. However, investors who seek higher return potential with higher risks should consider Las Vegas Sands for their portfolio, at the cash can be used to unlock future value if invested well.
This article was written by
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