An analyst suggests that Melco Resorts & Entertainment (NASDAQ: MLCO) ought to think about divesting its casino hotels in Cyprus and Manila to finance a complete buyout of Studio City International (NYSE: MSC) and concentrate on its aspirations in Thailand.
In a recent report for clients, Vitaly Umansky from Seaport Research Partners observed that Melco shares are undervalued, but the mood among investors regarding the stock is pessimistic, and this is unlikely to shift in the short term without significant measures like asset sales.
"Outside Macau, the Philippines (City of Dreams Manila) continues to generate cash but lacks real growth dynamics due to increasing Manila competition, while Cyprus has been a disappointment partly due [the conflicts in] Russia and Israel,” observed Umansky.
City of Dreams Mediterranean is the casino hotel operated by the company in Cyprus. Umansky states that when Melco presents its fourth-quarter outcomes, expected next month, Lawrence Ho's gaming firm will probably inform investors that it lost market share in Macau over the final three months of 2024. That could further pressure a stock that has declined 29.20% in the last year and 3.28% since the beginning of the year.
Analyst Urges Melco to Reassign Capital
Melco holds 55% of Studio City, the parent company of a Macau integrated resort sharing the same name.
“Studio City features 2,493 luxury hotel rooms, diverse food and beverage establishments and approximately 38,500 square meters of complementary retail space,” according to the company’s investor relations website.
Given Melco’s market cap of $2.35 billion and Studio City’s market valuation of $893.61 million (as of January 2024), the former should be capable of acquiring the 45% stake in the latter that it doesn’t currently possess without excessive financial burden. Umansky observed that if Melco were to completely purchase Studio City, it would pave the way for a merger with Melco International Development. This isn't the first instance of Umansky proposing the concept, as he did so roughly three years prior.
“We remain of the view that Melco would be better off at this stage, with low valuation and high debt, to try to sell its Philippines and Cyprus assets and reallocate the capital,” he said in the new report.
Casino Revenue May Assist Melco in Concentrating on Thailand as Well
If Melco decides to sell its casino resorts in Cyprus and/or Manila, it could allow the operator to concentrate its efforts more effectively in Thailand. The gaming firm recently announced plans to compete for a gaming license in that nation when lawmakers officially sanction casino gaming, which is anticipated to occur.
Umansky mentioned that operating solo in Thailand might pose financial difficulties for Melco, but the company could overcome these obstacles by collaborating with a partner—a strategy it has employed in other nations.
Umansky concludes that the operator's "advantage could stem from its capacity to engage in a less capital-intensive deal with local partners [similar to its approach in Sri Lanka], possibly within a secondary market in Thailand."