MGM: A HOLD-ADJUSTED MISS LIKELY

We qualify the miss since someone held well in July.  Despite at least 4 sell-side downward revisions in October, we’re still below consensus EBITDA by 4%.

Thanks to Big Ben, this asset heavy, debt-laden company’s stock has held in pretty well.  Meanwhile, management has done a good job refinancing its substantial debt and saved some dough on interest expense.  Ah, but those pesky fundamentals.  The Strip is going backward, not forward.  Slot volume and non-Baccarat table play are moving in the wrong direction. 

The slots have us particularly concerned as you may have noticed.  We don’t agree with the commonly held perception that the Strip is stable.  Slot revenue is high margin and the trend is down, not up.  Q3 RevPAR will be down which was supposed to be an anomaly.  We fear, MGM’s Q4 commentary will turn that anomaly into a trend. 

The Street looks too high for 4Q 2012 and 2013.  We are currently 13% below the Street in EBITDA for Q4 2012 and 10% below for 2013.  Our below Street numbers are predicated on our cautious macro outlook, way too aggressive Street growth estimates, inflationary cost pressures, and the unfavorable demographic picture we’ve highlighted over the past 6 months.

MGM will report Q3 earnings on October 31^st.  We estimate $2.3BN of net revenue and $446MM of consolidated property level EBITDA.  We also look at wholly owned EBITDA plus MGM’s pro-rata share of MGM China and City Center, less corporate expense which produces EBITDA of $395MM.  Our net revenue estimate is in-line with consensus while our comparable EBITDA is 4% below consensus.

Q3 DETAIL

We project MGM’s Strip properties to produce net revenue of $1,196MM and EBITDA of $248MM, in-line and 7% below Street numbers, respectively:  average RevPAR declines of 4%, low single digit casino and other growth, and low single digit operating expense increases.

• Bellagio:  $286MM of net revenue and $76MM of EBITDA, 1% above and in-line with consensus, respectively
  • 1% decline in RevPAR
  • 4% growth in casino & other
  • 4% expense growth
• MGM Grand:  $239MM of net revenue and $34MM of EBITDA, 4% above and 9% below consensus, respectively
• 2% decrease in RevPAR
• 3% growth in casino & other
• 2% YoY expense growth
• Last year and last quarter both suffered from low hold, so this quarter has a low bar
• Mandalay Bay:  $190MM of net revenue and $40MM of EBITDA, 3% and 4% below consensus, respectively
• 4% decrease in RevPAR
• 5% decrease in casino & other
• 5% decrease YoY expenses
• Mirage:  $144MM of net revenue and $23MM of EBITDA, 1% above and 13% below consensus, respectively
• 2% YoY decrease RevPAR
• 4% increase in casino & other
• 5% increase in expenses
• This quarter should have an easy comp as 3Q11 casino and other revenue declined 14% YoY due to MGM’s comment that Mirage experienced “very low hold”.  MGM also commented that hold was low in 2Q12.

Other U.S:

• MGM Detroit net revenue of $139MM and EBITDA of $41MM, in-line and 2% above consensus, respectively
• Mississippi net revenue of $126MM and EBITDA of $34MM, 3% below and 6% above consensus, respectively

We’re estimating that MGM Macau will report $688MM of net revenue and $172MM of EBITDA (the street is at $668MM and $165MM, respectively.)  Our assumptions in HK$MM’s are as follows:

• Net casino revenue of $5.3BN and total revenue of $5.3BN
  • Net VIP win of $3.4BN
    • VIP Turnover: 173,300 assuming 9% direct play
    • Hold of 2.93%
    • Rebate rate of 35% or 1.01%
• Mass table win of $1,430MM
• Slot win of $503MM
• Variable expenses of $3,245MM
  • $2,765MM of taxes and gaming premiums
  • $451MM of commissions to junkets
• Fixed expenses of $715MM
• $93MM of branding fees

We estimate that City Center will report $48MM of EBITDA on $264MM of net revenues:

• Aria:  $214MM of net revenue and $40MM of EBITDA
• Mandarin Oriental:  $11MM of revenue and $0MM of EBITDA
• Crystals:  $14MM of revenue and $9MM of EBITDA
• Vdara:  $21MM  of revenue and $5MM of EBITDA
• $6MM of development and administrative expenses

Other stuff:

• D&A:  $235MM
• Corporate & other:  $39MM
• Stock Comp:  $9MM
• Net  interest expense:  $276MM
• Income from unconsolidated affiliates & non-operating items from unconsolidated affiliates of ($24MM)
• $34MM of tax credits
• Minority interest of $67MM