Like all other gaming plays, Las Vegas Sands (LVS) was hit hard by COVID-related shutdowns, resulting in a severe sell-off in line with peers.
As re-openings continue, YoY GGR comps are steadily improving, but it is unclear when they will finally reach pre-COVID levels. Nevertheless, LVS has created a strong market-leading footprint in key locales (Macau, Las Vegas, and Singapore) with a fortress balance sheet that will allow it to ride out COVID-related business disruption for at least the next 18 months as illustrated below:
(Source: Q2 Earnings Presentation)
As an introduction to the LVS itself, it is important to note that despite its name, >90% of the company’s EBITDA is generated in Asia (Singapore/Macau) vs. Las Vegas. In these markets, LVS has created an enviable portfolio of market-leading properties ranging from the Marina Bay Sands to the Venetian Macao. Both Singapore and Macau are highly regulated end-markets with high moats to entry (licensee limits/high capital requirements), which limits new competition. Additionally, due to the proximity to China and the company’s high premium mass/mass mix, the company is highly levered to the burgeoning middle and upper-middle class in China.
Additionally, LVS has a strong book of non-gaming exposure (retail/conferences) which will continue to help provide helpful diversification in light of the Chinese/Singaporean governments’ push for “family-friendliness” in these integrated resorts.
Prior to COVID, the company has also posted consistent EBITDA gains and steady dividends yields of ~5% (since suspended). There is no question that historically, LVS was a well-run gaming company that delivered relatively consistent returns for shareholders. It is also why I am bullish on the company in the longer term although neutral for now.
To understand when a recovery and dividend reinstatement may take place, we need to take a deeper dive into the core markets that the company operates in. This will be the topic for the next few sections.
Outside of the obvious COVID-related headwinds, there are several key dynamics going on in this market that are worth noting:
- Increasing corruption crackdowns in the PRC, which will largely impact the VIP market. Given that the VIP business appears to be the first to recover, this will influence the trajectory of the overall recovery.
- Ongoing HK political instability may decrease overall tourist/gaming interest in the neighboring Macau area
- Supply growth with multiple new openings on the Cotai Strip in a depressed macro environment
- License rebidding will likely now occur in 2022. Terms are to be decided, but will likely come in the form of improved economics or other required non-gaming investments. This poses another nearer-term risk to the story.
Additionally, as Macau is trying to reshape itself as a family-friendly destination due to central government pressure, LVS is leading the charge with the company having a substantial amount of the retail and the majority of the convention space in the area.
What is in question for this end-market is the trajectory of the recovery. That remains uncertain. And although Chinese domestic consumption is recovering nicely, visa restrictions make it a less clear read-through for Macau.
LVS’ exposure here consists of the Marina Bay Sands and at some point the associated expansion. Reopening commenced on July 1, but this is still a location that is heavily dependent on international air travel, and the magnitude and trajectory of the recovery are still unclear.
However, the good thing about the Singapore end-market for LVS is that there is enough domestic demand to realistically drive a breakeven scenario for the company. Not exactly the best scenario, but in this environment you take what you can get.
Compared to the rest of the world, the US has been on a slower recovery trend line due to poorer public health compliance/policies. As such, the return to normal volume trends will likely extend to sometime into at least CY21 for several reasons:
- Even assuming that Strip visitors completely rebound, there are a few new properties coming on-line. So similar to what is happening in Macau, new supply in demand-depressed environments is not going to be positive as there will now be additional capacity that needs to be worked through. This is offset to an extent by social distancing requirements that will reduce overall facility capacity as well.
- The Strip is also highly reliant on convention business, which likely won’t resume until a vaccine is in place or on the off chance COVID “disappears.” This as well won’t likely happen until sometime next year.
It goes without saying that Q2 results were not great with all properties moving to an EBITDA loss. However, on the bright side, there are no major debt maturities until 2023 and the company has 18 months of liquidity even assuming a zero revenue situation. This should present a sufficient enough runway for the company to ride out this epidemic.
(Source: Q2 Earnings)
Figuring out a valuation and recommendation on a price target is tough as it is ultimately an epidemiological call on COVID. Looking historically, the company has traded mostly between 12 and 25x earnings. My 12-month price estimate of $41 is 20x the analyst average EPS estimate of $2.06 for 2021. Given that it is below where the stock is trading at now, I believe a neutral rating is warranted.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.