Morningstar | Another Quarter of Record High Earnings; Raising Galaxy Entertainment’s FVE to HKD 54. See Updated Analyst Note from 08 Aug 2018
Narrow-moat Galaxy Entertainment's second-quarter earnings beat our expectation with another record-high adjusted EBITDA of HKD 4.3 billion, up 32% year over year, despite affected by bad luck factor. The stellar results were underpinned by strong mass and VIP operations. We raise our fair value estimate to HKD 54 per share from HKD 49 after taking into account the better-than-expected performance. Nonetheless, we think Galaxy's shares remain overvalued, as we expect a cyclical decline in the Macau gaming sector around 2020 and higher tax payments to the Macau government as a requirement for license renewal.Galaxy's second quarter VIP and mass gross gaming revenue increased by 40% and 19% year over year, respectively, a respectable results considering the temporary disruption by the World Cup. The group's luck adjusted EBITDA in the second quarter was up 34% year over year and 1% sequentially. In particular, flagship Galaxy Macau's normalized adjusted EBITDA rose 29% year over year and down about 3% sequentially to HKD 3.3 billion. In spite of increased contribution from the lower-margin VIP business, adjusted EBITDA margin for the group based on gross revenue was up 91 basis points over the same period last year, and 37 basis points from previous quarter to 23.7%, reflecting management's drive to enhance operational efficiencies and prudent cost control.
While no exact details were given, management commented that the group has experienced a strong July post World Cup and a good August month-to-date in terms of growth in gross gaming revenue, with strength coming from both VIP and mass businesses. Going forward, Galaxy quoted ongoing trade tensions, currency volatility and China's slowing economy as potential risks. That said, the firm is still confident about its near-term business based on customers' solid forward hotel room bookings.
On the other hand, Galaxy's long-term growth should be supported by its development pipeline, which includes Cotai phases 3 and 4 (strong focus on nongaming), Hengqin expansion (plans to develop a low-density integrated resort) and venture into overseas markets such as Japan and Philippines. The firm is sitting on a net cash of HKD 34 billion and it has declared a special dividend of HKD 0.50 per share versus HKD 0.33, a year ago.
Galaxy Entertainment is an investment holding company, engaged in operation in casino games of chance or games of other forms, as well as the provision of hospitality and related services in Macau. In addition, Co. manufactures, sells and distributes construction materials through its Construction Materials Division across Mainland China, Hong Kong and Macau. Co.'s segments include gaming and entertainment, and construction materials.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.
Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
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