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JULY MACAU DETAIL

July gaming volumes hit a new monthly record besting even the seasonally stronger month of May

 

 

Thoughts

One of the big market takeaways is that July Rolling Chip volume actually exceeded the record set in May despite May typically being a much stronger month (Golden Week).  VIP hold percentage was slightly below that of May so that is why GGR didn’t set a new record in July.  Perhaps even more encouraging is that Mass table revenue grew over 41%, the highest YoY growth for that segment since May of 2010, and a new monthly record.

 

After reviewing the detail, we still think MPEL was the standout as market share increased 170bps sequentially to 15.6% in July, above what it was trending even before Galaxy Macau opened.  Importantly, the gains were not just hold related - VIP volume increased 40bps from June, Mass maintained its above trend share of 11.5% from June, and slot share actually increased 200bps.  On a YoY basis, MPEL grew its GGR 56%, well above market growth.  These metrics bode well for Q3 profitability, particularly relative to the Street.

 

As we previously discussed, Wynn’s market share was strong again in July at 15.2%, maintaining its pre-Galaxy share.  However, the details are not as favorable.  Wynn lost 140bps of Mass share from June, falling below 10% for the first time since August.  They also lost 110bps of VIP volume share but made up for it with a very high VIP hold percentage.  In essence, luck made the month for Wynn.

 

It’s been well publicized that MGM lost a lot of share in July and the details show the breadth of that decline – hold, Mass, and Rolling Chip volume all played a role.  LVS also lost a lot of share but that was related to a very high hold % in June although July hold was still well above normal.

 

Summary

Total gross gaming revenues increased 48% YoY to HK$23.5 billion.  We estimate that direct play was 6.3% in July vs. 7.9% last year.  Adjusted for direct play volumes, market hold was 3.06% vs. 3.17% last year.  If we normalize hold levels, July would have been even stronger growth month – up 52% YoY. August will have an easier hold comparison which should benefit YoY growth rates. 

 

 

Y-o-Y Table Revenue Observations:

 

Total table revenues grew 49% YoY this month, on top of 73% growth las­t July.  July Mass revs rose 41%; VIP revs grew 51%; and Junket RC soared 60%. 

 

For the 5th straight month, LVS table revenues grew the slowest – at 13%.  Over the 10 months LVS’s table revenues have grown at roughly 1/3 of the market’s pace.

  • Sands was up 18% YoY, driven by a 25% rise in VIP and 8% increase in Mass
    • Junket RC was up 17%
    • Sands held low in July, however, they held even lower last year.  Adjusted for 12% direct play (in-line with 2Q11), hold was about 2.5%, compared with 2.3% hold in July 2010 assuming 14% direct play (in-line with 3Q10). 
  • Venetian was up 11% in July. Mass rose 28%, while VIP barely budged – up only 0.5% impacted by lower YoY hold and below average Junket RC growth
    • Junket VIP RC grew 12%
    • Hold was a little low in July at 2.7%, based on 22% direct play (in-line with 2Q11).  In July 2010, hold was 2.9%, assuming 23% direct play.
  • Four Seasons was up 13% YoY driven by 12% VIP growth and 24% growth in Mass. 
    • Junket VIP RC tumbled 26%.  Four Seasons was the only casino we track to have an decline in Junket RC YoY.
    • Results would have been worse if not for very high hold.  Assuming 41% direct play (in-line with 2Q11), we estimate hold was 5.6% compared to 3.6% in July 2010 assuming the same direct play percentage.

Wynn table revenues were up 54%

  • Mass was up 27% and VIP increased 60%
  • Junket RC increased 63%
  • Assuming 8% of total VIP play was direct (in-line with 2Q11) , we estimate that hold was 3.4% compared to 3.3% last year (assuming 13% direct play – in-line with 3Q10)

MPEL table revenues grew 57%, driven by Mass growth of 79% and VIP growth of 53%

  • Altira revenues soared was up 115% with Mass up 70% while VIP ballooned 118%, benefiting from high hold and easy comparisons
    • VIP RC increased 54%
    • We estimate that hold was 3.5% vs. 2.5% last year
  • CoD table revenue was up 33%, driven by 80% growth in Mass and 23% growth in VIP, dampened by a difficult YoY hold comparison
    • Junket VIP RC grew 47%
    • Assuming 14% direct play levels, hold was 3.1% in July compared to 3.6% last year (assuming 13% direct play in line with 3Q10)

SJM revs grew 29%

  • Mass was up 25% and VIP was up 31%
  • Junket RC was up 56%

Galaxy table revenue skyrocketed 122%. Mass went up by 252% and VIP rose by 109%.

  • StarWorld table revenues grew 43%
    • Mass grew 37% and VIP grew 44%
    • Junket RC grew 13%
    • Hold was high at 3.6%
  • Galaxy Macau's total gaming revenues were $236MM, 47% higher than June
    • Mass table revenue grew to $45MM, up 34% MoM
    • VIP table revenue of $191MM, up 51% with RC volume of $5.8BN. Assuming no direct play, hold was 3.3%.

MGM table revenue grew 71%.

  • Mass revenue growth was 35%, while VIP was up 85%
  • Junket RC grew 112%, marking the 11th straight month that MGM has led in growth for this category- which is impressive given the opening of Galaxy Macau
  • Assuming direct play levels of 13%, we estimate that hold was only 2.3% this month vs. 2.6% in July 2010

 

Sequential Market Share (property specific details are for table share while company-wide statistics are calculated on total GGR, including slots):

 

LVS share in July fell 1.4% sequentially to 14.5%. This compares to 6 month trailing market share of 16.6% and 2010 average share of 19.5%

  • Sands' share dropped 1.1% to 4%, an all-time low in share equal to that of May’s
    • The increase in share was primarily attributed to a 130bps drop in VIP rev share
  • Venetian’s share dropped 2.2% to 7.2% share, an all-time low since opening
    • VIP share plummeted 2.9% to 5.2%, also setting a record low for the property
    • Junket RC increased 30bps to 4.6%, bouncing off an all-time low set in June
  • FS share increased 1.8% to 2.7%
    • VIP share increased 2.3% to 3.0%
    • Mass share increased 40bps to 1.8%
    • Junket RC ticked down 10bps to 1.0%

WYNN share was flat MoM at 15.2%, helped by high hold.  July’s share was above its 6 month trailing average share of 14.8% and 2010 average share of 14.9%.

  • Mass market share fell 1.4% to 9.9% - Wynn’s worst share since August 2010
  • Losses in Mass were offset by VIP market share gains of 40bps to 16.7%
  • Junket RC share fell 1.1% to 14.7%, below its 6 and 12 month trailing average of 15.1%

After Galaxy, MPEL market share rose the most with a MoM gain of 1.7% to 15.6%, above their average 6 month trailing share of 14.9% and 2010 share of 14.6%.

  • Altira share ticked up 10bps to 6.1%, compared to 5.6% average share in 2010
  • CoD’s share increased 1.5% sequentially to 9.3%
    • Mass market share inched up 20bps to 10.1% - second only to Venetian and ahead of Wynn’s share
    • VIP share jumped 1.9% to 9.1%

SJM share fell 1.2% to 27.8% in July- the lowest share since September 2008 and below its 6-month trailing average of 31.1% and 2010 average of 31.3%.

  • Mass market share fell 20bps to 36.1% - an all time low
  • VIP share fell 1.3% to 26.3%
  • Junket RC share 1.2% to 33.4%

Galaxy continued its momentum from Galaxy Macau, gaining 3.4% to 18.8%, its highest share since August 2007. July share compares with an average share of 10.9% in 2010 and a 6 month trailing average of 11.6%.

  • Galaxy Macau garnered 8.1% market share, up from 6.5% in June
    • Mass market share gained 130bps to 6.9%, VIP share gained 180bps to 8.5% and RC share gained 230bps to 8.4%.
  • Surprisingly, Starworld also gained 1.7% of market share to 9.4%, 30 bps above its TTM pre-Galaxy Macau level
    • Mass market share ticked down 10bps to 2.8% while VIP share rose 170bps to 11.4%

MGM lost the most market share in July with share falling 2.4% to 8.1% due to very low table hold.  July share compares with an average share of 8.8% in 2010 and a 6 month trailing average of 11%.

  • Mass share decreased 60bps to 7.2% - the lowest level since April 2010
  • VIP share plummeted 3.1% to 8.1%
  • Junket RC decreased 70bps to 10%, which was still materially above the property’s 2010 average of 8.4% but below its 6 month trailing average of 10.8%

 

Slot Revenue:

 

Slot revenue grew 34% YoY in July to $121MM, up 8% sequentially

  • Galaxy slot revenues grew at a white hot pace of 644% YoY, reaching $13MM
  • Wynn slot revenues grew the least at just 3% YoY, losing $2MM sequentially to $21MM
  • MGM had the second best growth at 50% YoY, increasing $1MM sequentially to $16MM
  • MPEL’s slot revenue grew 42% YoY, increasing $4MM sequentially to $23MM
  • SJM’s slot revenues fell $3MM sequentially to $15MM, up 6% YoY
  • LVS slot revenues grew 21% YoY to $32MM

 

JULY MACAU DETAIL - table

 

JULY MACAU DETAIL - mass

 

JULY MACAU DETAIL - RC


UPDATE: Dunkin Brands 2Q Profit Falls 1% Despite Dunkin Donut Growth



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WMS F4Q 2011 CONF CALL NOTES

Hard to find much positive in this quarter and the conference call didn't exactly alleviate intermediate concerns. We'll have more opinions in an upcoming note.

 

 

“Given our outlook for flat near-term industry replacement demand and the industry’s current pace of new technology adoption, we recently conducted a thorough review of our business strategies and product plans"

 

- Brian R. Gamache, Chairman and Chief Executive Officer

 

 

HIGHLIGHTS FROM THE RELEASE

  • $203MM of revenues and $0.44 of Adjusted EPS - missing street expectations and guidance and took down the top end of their FY12' to 3-5% growth from 3-7% top line growth
  • New unit sales: 6,510
    • NA: 4,043 with 3,700 replacement units
    • International: 2,467
    • "Ongoing growth in Australia and Asian markets was more than offset by lower shipments to Europe and Latin America."
  • ASP: $16,951
    • "The average sales price for new units increased 9%... largely reflecting a higher mix of Bluebird2 and Bluebird xD gaming machines coupled with a higher mix of premium products. Bluebird2 and Bluebird xD units accounted for more than 98% of total global new unit shipments"
  • Other product sales declined "primarily reflecting a decline in revenues from conversion kit sales and other higher-margin products."
  • Install base at QE: 9.870
    • "The quarter-end and average installed base were negatively impacted by idle participation units at certain casinos that were closed during a portion of the June 2011 quarter due to flooding along the Mississippi, Missouri and Ohio rivers. The estimated impact during the quarter from these idle units, including an above-average number of high-performing coin-in units, totaled nearly 8,000 lost unit revenue days, with an estimated impact to earnings of approximately $0.01 per diluted share."
    • "During the June quarter WMS received approvals for two new participation games – the STAR TREK Battlestations and Alice themes – and, including new games that received approval in the preceding quarter, installed over 500 of these new games"
  • Average win per day: $76.13
  • "Total gross margin was 57.4% compared to 60.7% in the March 2011 quarter and 63.8% in the year-ago period, and includes a 320-basis point impact of inventory, other asset write-downs and other charges, coupled with a lower mix of high-margin gaming operations revenues and a decrease in product sales gross margin"
    • "Product sales gross margin was 44.9% in the June 2011 quarter, including the $4.9 million, or 380-basis point, impact of inventory and other asset write-down charges included in cost of product sales"
    • "Gaming operations gross margin was 79.8% in the June 2011 quarter compared with 81.1% a year ago, reflecting the $1.7 million, or 230-basis point, impact of the asset write-downs and other charges included in cost of gaming operations, partially offset by favorable jackpot experience."
  • "We are streamlining our product management and product development functions, simplifying product plans and further prioritizing on-time commercialization of new game themes, products and portal gaming applications for our core product sales and gaming operations businesses. These actions are expected to better direct resources and focus on near-term revenue opportunities and will reduce our overall organizational staffing by approximately 10% to a level that better correlates with the current operating environment, while maintaining our ability to create great games that engage current players and attract new players. We expect these actions to further strengthen our operating efficiencies and effectiveness, meaningfully reduce costs and improve our operating margin. The tough decisions we made as part of the strategy review also led to the impairment, restructuring, asset write-down and other charges recorded in the fiscal fourth quarter. We expect to record further pre-tax charges of $11-to-$14 million, or $0.12-to-$0.15 per diluted share, in the September 2011 quarter, largely to complete the restructuring actions."
  • "Total revenues in the June quarter were less than anticipated principally due to lower product sales revenues resulting from the Company entering into an operating lease arrangement with the Seminole Tribe of Florida for 600 new units in lieu of prior expectations of a comparable unit-sized product sales order in the June quarter."
  • "During the June quarter, we began to realize benefits from initiatives announced in April aimed at improving operating execution and the ratable launch of new products, as quarter-end compression was reduced and the flow of new product approvals improved in the June quarter."
  • "We also decided to provide operating leases to selective customers as a way to leverage WMS’ solid financial position and strong balance sheet to bring our latest cutting-edge products to customers’ gaming floors.... Our new, multi-year operating lease agreement with the Seminole Tribe of Florida includes many of our most innovative new gaming entertainment products, such as the G+ Deluxe and Reel Boost series of video games and our Networked Gaming Portal applications. We will consider similar mutually beneficial operating lease arrangements with other customers when WMS can achieve an attractive return on investment.”
  • "WMS repurchased 674,664 shares, or $21.5 million, of its common stock in the June 2011 quarter at an average price of $31.83."
  • "WMS today narrowed its revenue guidance for fiscal 2012 and now expects 3%-to-5% growth over fiscal 2011. Overall, the Company’s guidance assumes that the general industry and economic environment will remain lackluster, with customers’ capital spending plans remaining flat with prior-year levels during the remainder of calendar 2011 and into calendar 2012."
    • further international market penetration
    • increased Class II opportunities
    • modest resumption of growth in the second half of the fiscal year in WMS’ participation business
    • a modest contribution from the commercialization of the Company’s initial portal game applications
    • a modest increase in online gaming revenues
    • expected improvement in new unit demand from an increase in new casino openings and major expansions in the second half of the fiscal year.
    • The Company expects the replacement cycle for gaming machines in the U.S. and Canada, along with overall average pricing, to change minimally on a year-over-year basis.
    • Guidance does not reflect any incremental revenues from the potential expansion of Illinois gaming or the opening of the Illinois or Ohio VLT markets.
    • R&D spending equivalent to about 13% of total revenues
    • Operating margin improvements
  • "Consistent with fiscal 2010 and 2009, quarterly revenues and operating margin are anticipated to be lowest in the September 2011 quarter and increase in each subsequent quarter with the highest revenue levels and operating margin in the June 2012 quarter. WMS expects quarterly revenues in the September 2011 quarter to be slightly below the percentage of annual revenue achieved in both fiscal 2010 and fiscal 2009, reflecting anticipated lower year-over-year demand as a result of the change in timing of the G2E industry trade show moving from the third week of November to the first week of October and a slightly higher percentage of revenues in the June 2012 quarter due to an anticipated increase in new casino opening activity."

 

CONF CALL NOTES

  • Expect further margin improvement for product sales in FY12
  • Expect revenues from new unit sales to increase slightly in FY12' but to be back end loaded
  • Expect that installed footprint will grow in F2012 and average daily revenue will remain flat
  • Expect that D&A will increase sequentially due to higher leased units and the BB2 refresh
  • Have 18 approved game themes in Australia and continue to have traction there
  • Progressing with approvals and field trials for their portal application products. Will continue to maintain pricing flexibility with early adopters.

 

Q&A

  • Based on their expected revenue increases and expected margin improvements they would be very disappointed if they don't meaningfully increase EPS in FY2012
    • This may be the only positive takeaway from the call but management did hedge by saying they are not providing EPS guidance - do they have credibility?
  • Pricing elasticity - are they pricing too high vs. their peers?  The ASPs they are quoting are already net of discounts
  • Thinks that their ship share is in the mid-20s this quarter. Expects that pricing will continue to be challenging in the next quarter or two.
  • When they spoke about margin improvements in '12 they are looking at adjusted margins
  • Pricing for used games is down even though units are flat
  • Think that the SG&A savings will be north of $20MM on a run rate basis
  • The cost savings will be through R&D, SG&A, and product margins too - since they are all headcount related
  • Operating leases will show up in other revenues in gaming operations. The current other game ops revenue includes royalties, operating lease revenue, and daily fee machines.  The current quarter doesnt include a full quarter of the Seminole fees.
  • Q1 will be lower than F09 and F10 as a % of year revenues
  • They are not actively pursuing deals
  • Replaced a third of their BB1 participation footprint. Feel like they have some pent up demand for their new participation titles. Pirate Battle was just approved in NJ.
  • Have 300 portal application units today, expect it to double by YE. By end of F12', think that they will have 100 customers. Feel like they can generate their own replacement cycle with the rollout of portal applications.
  • Product sale margins - think that 48-49% was a normalized level for the quarter when you add back the writedowns. Think it will be a ramp up from Q1 to Q2.
  • Italy - one regulator.  One of the early international providers is ahead of everyone in the queue so they are just patiently waiting. They haven't included Italy.
  • Capex - they will continue to convert the install base of their gaming operations business

PFCB - IS IT TIME TO BUY?

PFCB is starting to show up as a long idea in some people’s models.  Is now the time?

 

I’m getting a lot of questions about PFCB on the long side following the recent EPS miss and strong underperformance of the stock.  I agree there is big money to be made catching these mid cap restaurant turnarounds but, like catching falling knives, timing is critical.  The risk of sitting on the sidelines for now is that a PE firm or an activist investor may decide to make a run at PFCB.  However, at this point, we think there could be some downside risks, but we lack the catalyst to see how the turn is going to unfold.

 

From a valuation standpoint, PFCB is trading at 5.47X EV/EBITDA or about one multiple points away from the low multiple of 4.52 set back on 11/21/08.  Certainly, the stock is cheap but - in our view - it’s cheap for a reason. 

 

In order to become more constructive on the stock, we need a catalyst and visibility that there is a clear path to financial recovery.  While the company is addressing the needs of the core customer, it is very difficult to get a grip on how the company’s turnaround plans will impact the financial performance.  Until that becomes clearer, we will remain cautious on this name.

 

First, the company will be making several changes to the menu.  Enhanced Happy Hour offerings will likely drive traffic at the Bistro but judging the impact on margins from the new lunch menu will be difficult to do.  The company is attempting to boost its lunch business.  Management said that the change centers on a shift from serving dinner at lunch to serving lunch at lunch.  A standalone lunch menu has been rolled out in test markets with lighter fare that is portioned and priced for lunch and provides a wider variety of items.  At the same time, the new dinner menu will offer lower-priced entrées ($8-$12 range).  These initiatives are in the testing phase and, in our view; do not serve as catalysts on the long or short side.  We will be sitting and watching to see how these initiatives pan out.

 

Second, the guest service enhancements Bistro, through targeted staffing increases have not fully impacted the P&L yet.  Most importantly, spending on the new restaurant look and feel has been accelerated but how the capital will be deployed and what the return on that capital will be is unclear.

 

I’m not ignoring the changes at Pei Wei but the issues are largely the same. 

 

As you can see from the PFCB Hedgeye quadrant charts below, it will be another six months before investors will likely see improvement in the financial performance of the company.  In contrast to Brinker, a casual dining company that had successfully turned around its sales and margin trends before the stock worked. 

 

PFCB - IS IT TIME TO BUY? - pfcb quadrant chart

 

PFCB - IS IT TIME TO BUY? - eat quadrant

 

 

Howard Penney

Managing Director

 

Rory Green

Analyst

 

 


VALUATION IS NOT A CATALYST

Conclusion: This market is as cheap as consensus wants it to be – if you use the wrong forward EPS assumptions.

 

Position: Zero Percent US Equity Allocation.

 

When stocks get tagged like they are today, the fall back for equity investors is to point to valuation as a reason to remain positive on the outlook for equities.  While this can have credence at times, whether equities are truly a good value depends on the reliability of the forward earnings projection.

 

Currently, the S&P500 is broken from across all three of our key risk management durations, which is confirming our fundamental call for Growth Slowing on an intermediate-term basis. Although it is now morphing into consensus, we have held this contrarian view since the start of the year and both our bottom-up macro models and our top-down quantitative models continue to validate this conclusion.

 

Speaking to 2H11 specifically, Bloomberg Consensus (78 buy-side and sell-side institutions) forecasts for 3Q11 and 4Q11 GDP growth are still at +3.2% apiece on a QoQ SAAR basis. Our models continue to point to rates of U.S. economic growth that are half, or less, of those consensus estimates. We expect the consensus forecasts to once again be revised down intra-quarter, but to likely still be too high when it’s all said and done. If 1Q11 and 2Q11 have taught us anything about the merits of consensus growth forecasts, it’s that they are not to be trusted.

 

VALUATION IS NOT A CATALYST - 1

 

VALUATION IS NOT A CATALYST - 2

 

VALUATION IS NOT A CATALYST - 3

 

Perhaps the largest problem with consensus growth forecasts is that they are trusted. Be it corporations in their inventory planning, entrepreneurs in their plans to start businesses, consumers in their plans to lever up or spend, or bottom-up/fundamental equity investors in their EPS models, consensus estimates for U.S. GDP are pervasive throughout our economy. Given this construct, the biggest risk to this market and the U.S. economy at large remains that consensus assumptions for U.S. (and global) economic growth could continue to be way off the mark.

 

What if 2012 U.S. GDP growth is not in the area code of the +3% YoY rate currently forecasted by Bloomberg consensus? What if consensus’ +3.2% YoY assumption for 2013 U.S. GDP growth is equally as far off as their +3.2% YoY assumption for 2011 GDP growth has been? We would submit this scenario analysis would materially adjust the 2012 and 2013 EPS targets embedded in many bottom-up company models to the downside.

 

VALUATION IS NOT A CATALYST - 4

 

We’ve been vocal YTD on our call that the Street’s earnings assumptions are simply too rich.  With an S&P 500 NTM EPS forecast $99.73, consensus is clearly expecting a rebound in U.S. economic growth in their current modeling assumptions. We arrive at this conclusion based upon the conviction we have in our call for historically overstretched U.S. corporate margins to compress on a go-forward basis. Simply put, if margins are compressing, a company needs topline growth to outpace the rate at which its operating performance is deteriorating in order to drive earnings growth. We do not see that happening. 

 

VALUATION IS NOT A CATALYST - 5

 

In fact, slowing or declining GDP growth can lead to dramatically decelerating earnings. In the last decade we have seen this in spades as noted by the -21.5% decline in SP500 TTM earnings from March '01 through June '02 and -44.0% decline in S&P 500 earnings from September '07 through September '09. Going back the last thirty years, there have been five periods in which earnings for the S&P 500 broadly have declined.  On average, the decline has been a peak-to-trough decline of -25%.  In a scenario analysis where we assume we are entering a period in which earnings are on decline and they decline by the average of the five declining periods over the last thirty years, the implied earnings of the S&P 500 over the next twelve months is ~$74.79.  Based on the current price of the S&P 500, this is a ~16.2x earnings multiple.  Not exactly cheap.

 

With U.S. debt/GDP at 91.6% per the IMF (2010), we’d contend that consensus estimates for U.S. GDP growth over the next 2-3 years are as pollyanish as the Congressional Budget Office’s +2.9% average projected GDP growth over the next decade. Not only is the long-term trend of U.S. GDP growth over the last ten years far below that at +1.7% YoY, our 18-month-old work on the Sovereign Debt Dichotomy leads us to believe that U.S. economic growth may be more structurally impaired than not (email us for the relevant presentation materials).

 

VALUATION IS NOT A CATALYST - 6

 

Given the price action in the S&P 500, with the index crashing through its former long-term TAIL line of support (now resistance), we think the quantitative setup of this market is telling you that the above scenario analysis is now in play. Obviously Big Government Intervention in the form of additional easing out of the Fed could stand to limit any potential downside, but we’d be remiss to blindly trust our client’s hard-earned capital in the hands of the Central Planning Elite.

 

VALUATION IS NOT A CATALYST - 7

 

At a point, we think no amount of Quantitative Guessing will be powerful enough to overcome the likelihood that consensus (both buy-side and sell-side) has their 2011-13 EPS assumptions substantially off the mark. Again, the market can look as cheap as consensus wants it to look if they remain content with using the wrong denominator in their valuation studies.

 

Net-net, we need to do more work before explicitly making the call that both economic and earnings growth are going to come in substantially lighter than expected over the next couple of years, but, as market prices are signaling, it is a realistic possibility. And should that be the case, we’d expect the market to pay a lower multiple for that – QG3 or not.

 

Darius Dale

Analyst


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