Q3 should be even better on a hold adjusted basis.
MPEL reported $216MM in Q2 EBITDA, beating the Street’s Q2 EBITDA estimate by $41 million (24%). Net revenues were spot in-line with our estimate (above the Street) but EBITDA beat us by 20%. On a hold adjusted basis, Q2 EBITDA was $185MM.
Luck played a role in the strong quarter. Altira VIP held at 3.1% versus a normal range of 2.7-3.0% which positively impacted EBITDA by $15 million. Also, MPEL's properties held well on the volume junket business and less so on the revenue share which is a favorable scenario for profitability. Mass finally held at a normal rate. We had modeled $180 million with higher hold at Altira but not the favorable hold mix at the volume junkets. We estimate each generated an incremental $15 million in EBITDA for a total of about $30 million. Since we had modeled the former but not the latter, on an apples to apples basis, MPEL beat us by about $20 million.
Clearly, hold was not the only story. Margins were very strong even ex the hold dynamics. The Mass mix was more favorable, which boosted margins. It also appears that the company has reduced its cost structure. In 1H11, they have been focusing more on the premium Mass business which has a little less promotional expense attached to it. Promotional expenses were $11MM lower than we estimated and have been steadily declining as a % of casino revenue over the past 2 years Dare we say that MPEL is moving toward industry type margins? This would be significant for future EBITDA.
Going forward, with $185 million as a base and Q3 trending higher than Q2 on the revenue side, we think $190-195 million in Q3 EBITDA is a good, conservative range. The Street is currently at $160 million. If these margin gains are sustainable, we may be raising our estimates even further.