Via SeekingAlpha.com

This article is intended to follow up “The House Does Not Always Wynn,” by taking a closer look at the Q1 earnings report Wynn Resorts (WYNN) just released. In it, I will project gross revenues, expenses and cash burn rate by end of 2020. Finally, I will show that current valuation is unjustified and does not reflect heavy business disruption and all associated risks.

Business overview

Wynn Resorts Ltd. is a designer, developer, and operator of integrated resorts featuring luxury hotel rooms, casinos, high-end retail space, an array of dining and entertainment options and meeting and convention facilities. The pandemic will have a longer and deeper impact on these businesses than most people realize.

First of all, the sharp worldwide economic contraction, high levels of unemployment and shrinking disposable income will greatly reduce the demand for leisure and gambling, especially at world-class properties like the ones Wynn Resorts is running.

The second thing to consider is changed customer preferences – we’ve got used to working from home, to preparing home-made meals and have decreased spending by huge margin. I strongly believe that in the “after-pandemic” world, our choices as consumers will be different than before. Are we going to commute to the office every morning and spend money on overpriced work-related services, when we can be more productive and way more cost-effective working from home? A research among business event industry professionals and suppliers showed that 87% of respondents have canceled and 66% have postponed events as a result of COVID-19. Given the above, there is a strong possibility that business travel and demand for conferences and conventions never to reach pre-COVID-19 levels.

Finally, the virus threat – casinos are some of the most germ-friendly places, having people from all over the world in close proximity touching the same cards, chips and dices. Until societies completely overcome COVID-19, people will not be getting back to casinos the way they used to. The optimistic scenario is having a vaccine sometime in 2021, but it will take time for it to be produced on a huge scale. Even then, there will always be other viruses in the following years/decades.

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Q2 Estimate

According to information provided during the Q1 earnings call, Wynn Resorts is burning $5.9 million OPEX per day. On top of that, global interest expense + capex is $1.7 million, leading to a $7.6 million burn rate per day. When calculating Q2 cash, I assume full burn rate for April and May with basically close to zero gross gaming revenue (GGR). Currently, Las Vegas is fully closed while Macau is open, but due to visa restrictions, GGR for April had dropped 97% compared to the same period in 2019. My second assumption is for Wynn to reopen in June with 15% GGR, leading to approximately 85% of cash burn rates observed in April and May.

Expenditures Daily Cash burn April May June Q2 Total
Macau operations 2,25 67,5 69,8 57,4 194,6
US operations 3,6 108 111,6 91,8 311,4
Global interest expense + capex 1,7 51 52,7 51 154,7
Total 7,6 226,5 234,1 200,2 660,7

(Source: Created by Author)

Based on the information above, I have estimated 2020 revenue and operating expenses:

Estimates Q1 Q2 Q3 Q4 2020
Revenues 953,71 82,65 413,36 991,80 2441,52
Operating expenses 1022,38 689,00 1001,44 1001,44 3714,26
EBITDA -68,67 -606,35 -588,08 -9,64 -1272,74

(Source: Created by Author)

Both revenue and OPEX are projected compared to Q4 2019, which was the last fully operational quarter. In general, operating expenses cannot be decreased anywhere near the revenue drop. All businesses are located in world-class resorts, and they must continue to provide corresponding service even at lower occupancy. Nevertheless, I have assumed that Wynn optimizes the expenses by 20%, thus OPEX is 80% of Q4 2019, which equals $1 billion per quarter. Q2 revenue is calculated on the basis of practically none for April and May plus puny recovery in June with GGR at 15% of Q4 2019. Expense estimation consists of full cash burn for April and May of $356 million (previous table) plus June OPEX of $333 million (a third of $1 billion). My assessment is recovery in Q3 with revenue 25% of Q4 2019 and moderate recovery in Q4 with revenue 60% of Q4 2019.

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Cash position

Cash Estimation 2020
Beginning cash – Q1 2 890
New Junk Bond 600
Cash burn through operations -1 273
Principal payable in 2020 -243
Interest expense -386
Other contractual obligations -372
Cash at the end of 2020 1 217

(Source: Created by Author based on 2019 10-K data)

Cash outflows are calculated as 75% (three quarters remaining) of the payments due in 2020 according to the 2019 10-Q.

As my fellow contributor Montana Skeptic explains in his great article, when someone examines a company’s liquidity, he must first subtract the minimum amount of liquidity (cash plus credit) he believes the company must have should things go south and require a restructuring. Without that minimum cash level, a successful restructuring on Chapter 11 of the Bankruptcy Code becomes a miserable liquidation under Chapter 7. There is no exact number for this minimum level, but it should be somewhere between 200-300 million for a company the size of Wynn Resorts. Given the above, the useful liquidity by year-end is less than $1 billion, which is a dangerous level considering Wynn Resorts’ long-term debt, contractual obligations and business disruption.

With this in mind, I believe the company will be forced to raise capital by year-end, otherwise it will be imprudent.

Valuation

Based on all of the above, I will try to summarize and explain why the current stock price is way off its intrinsic value.

Wynn Resorts 2020Е
Long-term Debt 11 970
Cash 1 217
Market Cap 9 380
EV 20 133
EBITDA -1 273
Sales 2 442
Price/Sales 3,84
EV/Sales 8,25
EV/EBITDA -15,82
Debt/EBITDA -9,40
EPS* -19,80
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(Source: Created by Author)

*EPS calculation is made on a high level by adding principal and interest expense to EBITDA and dividing by total number of shares. This approach does not include depreciation and amortization, extraordinary items and taxation. The result represents money the business will make in 2020 without accounting techniques.

All ratios shown above point to the fact that Wynn Resorts is significantly overvalued by the market. There isn’t a single metric which could lead us to a different conclusion.

EV/EBITDA – With negative EBITDA, the multiple is somewhat useless, but consider the fact that this ratio is believed to be “healthy” in the range of 10-12, so in order for the current price to be fair, the EBITDA should be around $1.7-2 billion – a figure that wasn’t achieved even at the top of the business cycle in 2019, when Wynn Resorts reported EBITDA of $1.5 billion.

Price-to-sales is 3.84, significantly above the S&P average of 2.03.

Estimated loss is approximately $20 per share. This is a devastating number to a company the size of Wynn Resorts.

Price-to-book value is 5.85, compared to the S&P average of 3.15.

Revenues are only 20% of long-term debt, and combined with negative EBITDA, Wynn Resorts is not in a position where it can service its debts.

Conclusion

I hope that by this point we all agree that 2020 will be devastating for Wynn Resorts. While it is somewhat normal for a global pandemic to heavily disrupt a business, it seems that the stock market is currently pricing a sharp revenue recovery in Q3 and Q4 and not take into account the possibility of a prolonged contraction in the sector.

Disclosure: I am/we are short WYNN. 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.