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Issue Oriented

Crunch time in Macau; Brexit bombshell; Isle rebound

Issue Oriented

We are about to learn the near-term future of Macau gaming, and with it, the near-term fate of the casino operators whose stocks have crashed in recent years.

The story will be told by the success, or otherwise, of Wynn Resorts’ Wynn Palace opening in August, Las Vegas Sands’ Parisian the following month, and MGM Cotai early in the new year.

Last year’s ballyhooed resort openings did not live up to hopes that they would stem the decline in gambling revenue and ignite the mass-market business, drawing tourists in the Las Vegas manner.

Indeed, Melco Crown’s Studio City, seen as the poster child for the new approach, has so disappointed that the company which boasted that the new property had no VIP tables is now adding them.

LVS and WYNN believe they will be different.

LVS says the Parisian, with its half-size Eiffel Tower, will be immediately iconic and will draw tourists just like Venetian attracts them to its canals.

WYNN expects Wynn Palace to be a true palace that will be the first choice of the affluent and of high rollers.

The hope for MGM Macau is based in large part on scale—the property will more than triple MGM’s capacity in the market, meaning big upside potential.

If the three companies are right, expect to see their stocks benefit significantly.

Early indicators are mixed. Praveen Choudhary of Morgan Stanley reported that his survey of room rates show Wynn Palace is commanding high prices. The property leads the pack, only except for Ritz Carlton and Banyan Tree, he said.

Those high rates benefit both Wynn and competitors who can maintain rates through the opening, Choudhary said.

Indeed, Choudhary raised his rating on Hong Kong-listed Wynn Macau to equal rate in part based on early strong demand and rate, but he also cautioned that the property might not achieve EBITDA projections of $450 million to $600 million next year because of soft gambling demand.

Morgan Stanley also sees some weakness in Macau’s most important market, China, citing a firm-commissioned survey showing average stays by mainlanders down to 3.3 days from 4.4 last year. That could be worrisome, because the Las Vegas-like model relies on multi-night stays and spending outside of casinos.

The survey also finds competition coming from what at first blush seems a strange place—Disneyland.

Thirty percent of survey respondents said they might visit Macau less often as the new Shanghai Disneyland wins some of their business.

Finally, there is the increasing competition from the likes of South Korea, the Philippines and Australia for VIP players.

Not all news out of the Morgan Stanley survey was negative. Twenty-six percent of respondents said they intend to gamble more this year, and 70 percent say they will still visit Macau.

We’ll know soon enough whether Wynn Palace and Parisian are sufficiently compelling to do for Macau—or at least for their companies—what Galaxy II and Studio City so far have failed to do, or whether Macau becomes a long slog for all the operators despite investing billions of dollars.

Should You Exit With Brexit?

Britain’s decision to leave the European Union is one of those events that captures the public imagination.

For many investors, it became a reason to sell out of British gaming stocks.

But that reaction might have been premature.

Consider: The companies with a big online presence aren’t headquartered in Britain, anyway. They chose to domicile in tax havens such as Gibraltar. As such, they might continue their EU membership, thus access to European markets.

One concern is that Gibraltar could lose its EU access as a British protectorate, but nothing would then prevent U.K. operators from relocating to an EU member country.

The greater issue might be long-term effect on the British economy and currency, but for now that’s speculative.

In the meantime, Britain’s Brexit negotiations with the EU will bear watching.

Isle Of Capri, Welcome Back

New Isle of Capri CEO Eric Hausler said in his company’s quarterly investor conference call that he’s excited about fiscal year 2017, which started May 1.

And well he should be.

For the first time in a very long time ISLE is no longer a regional casino operator so burdened by debt that its price-to-sales ratio was depressed well below 1-to-1.

Indeed, ISLE’s ratio of debt-to-EBITDA of 4.4 times is now below that of most casino operators, and it’s headed down towards the upper 3s to low 4s, Hausler said.

That means investors can begin to value ISLE on its ability to generate earnings, and with adjusted earnings per share up to $1.26 last year and 62 cents in the fourth quarter, there appears to be plenty of room to get the stock price up to where that price-to-sales ratio is far beyond its current 0.6-to-1.

It also means that ISLE can look to grow like a conventional company, a fact Hausler addressed in the conference call when he talked about parameters for buying casinos, expanding into new jurisdictions, upgrading properties and upgrading casino floors.

In turn, that brought some cautionary advice from analysts. In other words, after so long in the wilderness, ISLE remains something of a show-me stock even after growing EBITDA and EBITDA margins in eight of the past nine quarters.

However, investors waiting too long to be shown could risk missing the best part of the ride.

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