EUR 850.00 For Business Accounts Only

Morningstar | Lifting SJM’s FVE by 30% to HKD 11.60 to Reflect Higher ROIC for Grand Lisboa Palace. See Updated Analyst Note from 21 Jul 2019

We lifted our fair value estimate for SJM Holdings to HKD 11.60 from HKD 8.90 per share, due to our revised return on invested capital, or ROIC, assumption of Grand Lisboa Palace, or GLP. We think SJM is undervalued and the key catalyst is the opening of GLP. Our latest fair value implies an EV/EBITDA of 16.8 times for 2020, the first year of operation of GLP, and 12.9 times for 2021. We reckon SJM’s average EV/next-12-month EBITDA ranged bound between 3.1 times to 11.9 times in the past five years, with an average of 7.9 times. Using historical multiple as a cross check, our implied EV/EBITDA appear to be high. However, we think the opening of SJM’s Cotai property is a fundamental change in competitiveness and warrants a higher implied EV/EBITDA. GLP will provide almost 2,000 rooms, versus the current flagship Grand Lisboa’s 400 rooms, giving SJM the much needed resources to attract higher-end customers and higher-margin premium mass. The positioning of GLP is also more high-end versus Grand Lisboa.

Our forecasts for GLP are consistent with our view the company has weaker execution and the project has a high construction cost. We assume GLP’s ROIC will only surpass SJM’s WACC of 9.1% by 2025, and rising only to 11.3% by 2028. Based on our thesis that demand for gaming in Macau will continue to surpass supply in the coming decade, and all the current gaming license holders will win the tender of the licenses in 2022, we believe an assumption in a spread between ROIC and WACC for GLP is reasonable. In the first year of opening, we assume GLP to generate an adjusted EBITDA margin of only 13%, 2% below MGM Cotai’s first year of operation, to factor in SJM’s weaker management, SJM’s lack of experience in premium mass business, and the lack of premium mass customers’ database. By 2028, we assume adjusted EBITDA margin of GLP will be 26.4%, below all the major peers’ Cotai large-scale properties, to reflect its inferior location and weaker management.