What's the idea?
- New acquisitions and geographic expansion, combined with the launch of new projects and active advertising campaigns, will drive business growth.
- Additional support will come from positive trends in the casino industry.
- The sale of strategically unprofitable assets and an adequate debt load will ensure financial sustainability when investing in new projects.
- Maintaining additional growth potential with the removal of restrictions in Maca
About Company
MGM Resorts is a large holding company that owns and operates subsidiaries, including casinos, hotels and entertainment resorts, in the US and Macau. The holding company's portfolio includes 33 hotel and gaming destinations worldwide, including some of the most recognisable in the industry. The company's business is divided into three segments:
- Las Vegas Strip Resorts — Aria, Bellagio, The Cosmopolitan, MGM Grand Las Vegas, Mandalay Bay, The Mirage, Luxor, New York-New York, Excalibur, Park MGM.
- Regional Operations — casino resorts in Michigan, Mississippi, New Jersey, Maryland, Massachusetts, New York and Ohio.
- MGM China — includes the Macau-based MGM Macau and MGM Cotai venues.
Why do we like MGM Resorts International?
Reason 1. Acquisitions and project development
For 2021, the gambling industry was able to recover to 2019 levels and continued to grow in 2022. Improved financial health allows for increased investment in business growth in areas such as:
Acquisitions: In May, BetMGM submitted an offer to buy Stockholm-headquartered global online gambling company LeoVegas for $601 million, and the offer was approved by LeoVegas shareholders on 31 August. The acquisition will support MGM's international growth in digital gaming and sports betting through LeoVegas' licenses in eight jurisdictions, predominantly in Northern Europe.
Launch of new projects:
- On 1 September, Kansas decided to legalise sports betting, making the BetMGM app available in the state. Kansas is the 24th state where the company provides sports betting services.
- On 6 October, BetMGM announced the launch of new NHL-branded games for casinos in New Jersey, Ontario, Pennsylvania and Michigan.
- In September last year it was announced that MGM had been selected as a partner to introduce integrated resorts in Japan, and on 27 April this year a development plan for the area was presented to Japan's central government. Licences for integrated resorts are expected to be issued as early as 2022. MGM management then expects an opening date in the second half of the 2020s. The projected annual volume of visitors to the resort is around 20 million.
Increase in the list of partners and endorsers:
- On 9 August, BetMGM expanded its partnership with the NFL to become one of the league's official sports betting partners in Canada.
- On 10 August, the company appointed actor Ferrara as brand ambassador.
- On 1 September, BetMGM entered into a partnership with the Kansas City Chiefs and became one of the team's first sports betting partners. Under the terms of the agreement, BetMGM's signage will be present at Arrowhead Stadium and the company's content will be placed through the Chiefs' digital channels. The partnership is designed to support the launch of mobile sports betting in Kansas, which we covered above.
- An advertising campaign featuring film stars and famous athletes was launched on 6 September.
- On 21 September, the company announced a partnership with NBC Sports in which advertising integrations will be shown on NBC Sports platforms, including the most watched sports show, Footbal Night in America.
- On 22 September, actress Vanessa Hudgens joined the BetMGM Ambassador team.
- On 27 September, it was announced that Maroon 5 will headline the Las Vegas Residency at Park MGM in March, April, July and August 2023.
- On 11 October, BetMGM became the official betting partner of the Cincinnati Reds club.
In our view, these measures will help increase attendance and brand awareness, as well as expand MGM Resorts' customer base, which will have a positive impact on the company's financial results.
Upgrading existing space: On 12 October, the Mandalay Bay casino resort announced a $100 million renovation of its 2.1 million sq. m convention centre. The renovation will include the refreshment and modernisation of the space. At the same time, the convention centre will not be closed during the renovation until the end of 2024. The Mandalay Bay improvements may attract more potential customers for MGM.
Reason 2. Positive industry trends
In addition to business units already open in states where betting has been legalised, we also expect further expansion in jurisdictions where the legalisation process has not yet taken place.
Sports betting is expected to be legalised in Ohio in January. As such, BetMGM to start offering services in that state on 1 January. As we mentioned above, the company has already started to strengthen its presence in Ohio through a partnership with the Cincinnati Reds.
The legalisation process is also underway in Maine, Massachusetts and Nebraska. In our view, company units in these jurisdictions could open as early as 2023. In addition, attempts at legalisation are also being made in California.
BetMGM currently has a presence in 24 jurisdictions, but expects this figure to increase to 31, as the infographic below shows:
The emergence of new jurisdictions for mobile sports betting is important as it allows for market in a rapidly growing area.
The US gaming industry as a whole is doing well: according to American Gaming Association research, the commercial gaming industry in the US at the end of Q3 broke the quarterly record of the previous year, increasing GGR (gross gaming revenue — the difference between the amount players wager and the amount they win) from $14.8 billion to $15.2 billion. At the same time, revenue growth is observed in all gaming areas both for three quarters together and for the 3rd quarter. Sports Betting and iGaming are leading the way with 80.6% and 28.5% year-on-year respectively.
The following breakdown by state shows that GGR is positive in all states where MGM Resorts has a presence except Mississippi.
Separately, it is worth to note that coronavirus restrictions cannot last forever: when China eases the restrictions to a level that allows casinos to operate, MGM Resorts' stock price could be predicted to rise due to investors' expectations of increased cash flows. For now, the biggest outbreak in two years, with the number of active coronavirus cases in Macau reaching 520 in July 2022, has come to an end. However, as of 8 October, two new cases of infection have emerged. Therefore, given China's policy on epidemiological regulation, we see no signs signaling the lifting of restrictions before the end of the year.
Financial indicators
The company's results for the last 12 months:
TTM revenue: up from $8.12 billion to $12.59 billion
TTM operating profit: up from $1.55 billion to $1.81 billion
in terms of operating margins, decrease from 19% to 14.4%, mainly due to "other unusual expenses"
TTM net income: up from $676 million to $1.32
in terms of net margin, up from 8.3% to 10.5% due to lower non-operating interest costs
Operating cash flow: up from $643.3 million to $1.78 billion, due to positive changes in accounts payable
Free cash flow: up from $228.1 million to $1.16 billion
Based on the results of the most recent reporting period ended 30 September 2022:
Revenue: up from $2.71 billion to $3.42 billion
Operating profit: down from $1.89 billion to $1.05 billion:
in terms of operating margins, down from 69.9% to -30.6%, mainly due to the need for new injections into MGM Grand Paradise for the new gaming concession required to operate a casino in Macau
Net income: down from $1.35 billion to $0.58 billion
in terms of net margin, down from 49.9% to -16.9%
Operating cash flow: down from $518.3 million to $398.1 million
Free cash flow: decrease from $564.6 million to $178.4 million, mainly due to investments in acquisitions
MGM Resorts has shown good financial results both for the last 12 months and for the last reporting period. The negative profit for the quarter is a one-off event — a new concession in Macau should not be required for the next decade.
- Cash and cash equivalents: $5.30 billion
- Net debt: $4.56 billion
- Net debt / EBITDA: 2.3x
The company has a moderate debt load for the sector, with additional cash flow from the sale of The Mirage Hotel & Casino and the sale of Gold Strike Tunica in the first quarter of 2023 providing sufficient cash for further strategic investments. Both properties for sale are located in Mississippi, the state with the fastest declining casino revenues in the US.
Evaluation
In terms of trading multiples, MGM is undervalued by all measures except P/CF (19x vs 12.19x) and P/B (2.69x vs 2.33x).
MGM Resorts pays its shareholders a dividend yield of around 0.03% per annum.
Ratings of other investment houses
The minimum price target set by Trust Financial and UBS Group is $40 per share. Credit Suisse, in turn, set a target price of $67 per share. According to the consensus, the fair value of the stock is $51.8, which suggests an upside of 40.73%.
Key risks
- The worsening economy may force some customers to reduce their spending at casinos.
- Lack of certainty as to how long the restrictions in , which are slowing down the company's growth, will last.
- Legalisation of betting in individual states could be delayed, which would reduce the growth rate of MGM's financial results.