Key Highlights

  • Melco Resorts & Entertainment (NASDAQ:MLCO) appears on the aggressive small cap screen with a one-year EPS change of 61.75%, a trailing P/E of 10.90 and a Market Value of about USD 1.55 billion, at USD 4.33 in the November 13 snapshot.
  • Third quarter Revenue fell about 10% to USD 1.17 billion and adjusted property EBITDA dropped about 24% to USD 287.6 million, with Net Income of only about USD 34 thousand.
  • A low VIP win rate of 2.49% at City of Dreams Macau, below the expected range of 2.85% to 3.15%, explains much of the decline, while Cyprus delivered record EBITDA.
  • Melco repurchased about USD 160 million of ADSs between July 1 and November 3, with about USD 487 million of authority left, and the shares closed 12.14% higher on November 4.

A Quarter Hit by Luck and a Soft Macau

Melco reported on November 4. Total Operating Revenue fell to about USD 1.17 billion from USD 1.31 billion, Operating Income fell to USD 100.2 million from USD 184.5 million, and net income attributable to the company was close to zero, at about USD 34 thousand, against USD 74.7 million a year earlier. Adjusted property EBITDA fell about 24% to USD 287.6 million. The biggest swing came at City of Dreams Macau, where EBITDA dropped to USD 130.3 million from USD 206.9 million. Part of that was luck: the rolling chip win rate was 2.49% against 3.68% a year earlier and below the normal range of 2.85% to 3.15%, which reduces revenue without reflecting customer demand. Studio City EBITDA fell to USD 90.6 million from USD 104.7 million, and City of Dreams Manila declined to USD 32.9 million. Macau mass market trends remained soft, as visitors continued to spend cautiously.

Why Investors Bought the Shares

The stock rose 12.14% to USD 4.71 on the day of the release, which suggests the market had already priced in a weak quarter and focused on Capital returns and the growing non-Macau business. City of Dreams Mediterranean in Cyprus and its satellite casinos posted record quarterly EBITDA of about USD 25.7 million, up 11%, showing the benefit of geographic diversification. Buybacks are large relative to the company's size. Melco bought back about 33.1 million ADSs for about USD 160 million between July 1 and November 3, adding to about USD 120.6 million repurchased earlier in the year, and has up to about USD 487 million of authority left, roughly a third of the market value shown on the screen. The Studio City land concession was renewed in October through 2036, removing a long-standing uncertainty. The screen's EPS change of 61.75% reflects a recovery in trailing Earnings from a weak base, although the latest quarter was close to breakeven.

Debt and the Road Ahead

Leverage is the main constraint. Total Debt was about USD 6.98 billion at September 30, against cash and bank balances of about USD 886.6 million. Melco has been actively refinancing: it redeemed USD 600 million of notes due 2027 in September using a revolving Credit facility, redeemed USD 165 million of Studio City notes due 2028 in July, and earlier extended its main revolving Facility to 2031. These steps push out maturities but keep total debt high, so interest costs will continue to absorb a large share of EBITDA. Looking ahead, investors will watch whether VIP win rates return to the normal range, which alone would lift reported EBITDA, how Macau mass gaming revenue trends through the holiday season, and progress at the Sri Lanka project and in Cyprus. Lower debt and continued buybacks would support the case for a rerating from the low P/E on the screen.

Where Things Stand

Melco (NASDAQ:MLCO) had a weak third quarter, partly because of unlucky VIP results, but the market rewarded heavy buybacks, record Cyprus profit and a renewed Studio City land concession. With about USD 6.98 billion of debt, the shares still depend on a recovery in Macau and steady refinancing.