THE HEDGEYE EDGE
Melco Crown has quintupled in the last 2 ½ years since we began recommending it at $4. However, the upside has been driven mostly by higher earnings than expected and not as much by multiple expansion. We’re still higher than the Street on earnings but we believe that MPEL is finally ripe for some serious multiple expansion.
Here are some reasons why we believe the stock, even though it’s trading at its 52-wk high, can move higher: 1) We believe Macau should have a great year in 2013, with MPEL maintaining/gaining share. Current Q1 2013 and FY 2013 estimates for MPEL remain too low. 2) With one of the best locations in Cotai, MPEL’s JV, Macau Studio City, is scheduled to open in 2015. We believe a 20-30% ROI is not unreasonable. 3) Free cash flow (before project capex) is well over $1 billion and net debt is roughly zero 4) Given that MPEL is not yet considered to be an investable stock by most long only investors, there is opportunity to build a bigger base of investors which should boost the multiple.
On a forward EV/EBITDA basis, MPEL only trades at 8x 2014 EV/EBITDA after excluding Macau Studio City construction costs. The other US listed Macau operators currently trade between 9x and 14x. What’s the right multiple? We think a 11-12x multiple is sufficient for now, which implies a $30 stock with upside from there as investors begin to look forward to the opening of Macau Studio City.
INTERMEDIATE TERM (the next 3 months or more)
Q1 earnings should be a good one. The Street continues to underestimate MPEL’s potential and we’ve above for both Q1 and 2013.
LONG-TERM (the next 3 years or less)
Macau is poised to grow considerably with latent demand and better transportation infrastructure. MPEL will capitalize on the market growth but also maintains a deep bench of new unit growth. In addition to a Filipino project, Macau Studio City should be a gem in 2015, considering its prized location on Cotai. It is situated close to the Lotus Bridge and to the upcoming Light Rapid Transit station. We believe the stock is becoming more attractive to long only investors as management continues to prove itself, the company continues to grow same store EBITDA, and new growth projects move into the forefront.