An Undervalued Gem In Macau: Morgan Stanley Upgrades Wynn Macau To Overweight

Morgan Stanley’s Praveen Choudhary noted that while the opening of Wynn Palace missed expectations and could lead to negative revision of expectations, the market might be underestimating its long-term potential.

Choudhary upgraded the rating on Wynn Macau, Limited, a part of the Macau operations of Wynn Resorts, Limited WYNN from Equal-weight to Overweight, while lowering the price target from HK$14 to HK$13.

Growth Expectations

The analyst believes that a two-year EBITDA CAGR of 20 percent, a dividend hike and deleveraging could lead to higher upside potential for Wynn Macau.

Choudhary mentioned four reasons for getting more positive on the company, including expectations of 20 percent EBITDA CAGR from US$676 million in 2016 to US$961 million in 2018, which would be the highest EBITDA growth among its peers.

Undervalued

In addition, the analyst believes that Wynn Macau’s operating leverage is being underestimated, explaining that once a casino is EBITDA breakeven, “50 percent of incremental mass revenue drops to EBITDA. Every 1 percent incremental mass revenue market share should add US$60mn of EBITDA to the company.”

Choudhary also expects dividend growth to make a comeback and be sustainable. The company paid HK$0.60 as dividend per share in FY15 and with no further capex needs visible in the near future, Wynn Macau is likely to at least maintain its dividend, which would imply more than 5 percent yield.

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