MPEL: NO DEAL, GOOD DEAL

It appears MPEL has no plans anytime soon on issuing new equity so let’s get back to the fundamentals.

MPEL shot up 14% yesterday.  Think you’re too late?  I think not.  Apparently, the company will not be diluting shareholders anytime soon with an equity offering.  With that overhang out of the way, investors can get back to the fundamentals.  The Street is 30-40% too low on EBITDA for Q3 and Macau has shown no signs of a slowdown, even through Golden Week which looks very strong for the market. 

Worried about a China slowdown next year?  Okay, but at 6x EV/EBITDA it appears that the market is even more worried than you.  As a reminder, MPEL traded at 8x EBITDA when the stock was at $4.  What’s the right multiple?  Given that Macau operators pays no income taxes on gaming profits and domestic gaming companies trade at 6-8x, we would argue for a range of 8-12x and maybe higher since valuations are depressed.

As we said on Tuesday (MPEL: COULD THE SHAREHOLDER MEETING BE A CATALYST?), we think it is unlikely MPEL raises equity anywhere close to these levels.  Our view was confirmed today by multiple press reports.  It makes sense to pull the raise – the valuation is ridiculous and the company only has required contributions to the Macau Studio City project of $25 million in September of 2012 and 2013. 

Given the negativity over the last month or so and the ugly prospect of a dilutive equity deal, we suspect there may be a number of short sellers looking to cover.