US investment firm CBRE has maintained its “Buy” call on shares of Melco Resorts & Entertainment, citing “underappreciated value” after they fell by around 15% following release of the company’s 3Q23 financial results this week.
Analyst John DeCree said in a Wednesday note that Melco shares had fallen 44% since reporting its results for the June 2023 quarter back on 1 August, significantly more than the average decline of 18% by fellow Macau-facing, US-listed operators Las Vegas Sands, MGM Resorts and Wynn Resorts during the same period.
While DeCree has lowered his price target for Melco from US$20 to US$15 on a revised FY23 EBITDA estimate of US$1.47 billion – down from US$1.59 billion – due to “lingering China macro concerns,” he added, “We still see underappreciated value in the shares of Melco, which are trading at just 7.1x our updated FY24 EBITDA estimate.”
Melco’s Q3 results included Adjusted EBITDA of US$244 million, described by DeCree as mostly in-line with estimates despite being negatively impacted by low VIP hold.
What may have concerned investors, he added, was the fact that the company’s Q3 recovery was mostly seen at Studio City rather than City of Dreams Macau. Hold-normalized EBITDA grew by 50% at Studio City for the quarter versus just 1.5% at City of Dreams.
“While City of Dreams recovered more sharply earlier in the year, the shift in recovery from City of Dreams to Studio City could have an impact on valuation with growth now coming from a joint venture-owned asset vs the wholly owned City of Dreams Macau,” DeCree wrote.
“Shares of Melco tend to trade more off City of Dreams Macau’s results than Studio City given the ownership/valuation dynamic. That said, we still expect City of Dreams EBITDA to accelerate in 2024 and recover to ~85% of 2019 levels vs ~72% currently.”
