EUR 850.00 For Business Accounts Only

Morningstar | SJM’s 2Q Results Continue to Beat Expectation; Raising FVE to HKD 8.0 Per share. See Updated Analyst Note from 01 Aug 2018

We raise our fair value estimate for narrow-moat SJM Holdings to HKD 8.0 per share from HKD 7.2 after factoring in the better-than-expected results. We still consider the shares as expensive, as we forecast a cyclical downturn in the gaming market that will start to impact revenue and earnings in 2020. SJM's adjusted EBITDA in the second quarter surged 46% year over year and down 2% quarter over quarter to HKD 972 million. Adjusted for luck, second-quarter adjusted EBITDA was up 3% quarter over quarter to HKD 1.0 billion. The strong results were mainly attributable to cost-cutting efforts, absence of one-off charges and better business mixes (faster growth in higher-margin grind mass), which resulted in a 170-basis-point year-over-year improvement in adjusted EBITDA margin to 11.3% in the second quarter. In particular, mass revenue rose 17% year over year and was flat quarter over quarter, compared with VIP revenue which was up 4% year over year and quarter over quarter, respectively. This suggests that management's strategy to focus on grind mass market is bearing fruit.

Flagship Grand Lisboa's second-quarter adjusted EBITDA was robust and grew 43% year over year and down 4% sequentially. Although adjusted EBITDA margin dipped to 13.3% from 14.2% in the previous quarter, it was mainly due to bad luck factor. Adjusted for luck, margin should remain healthy at 14.3% for the quarter. Management guided that the property should continue to report adjusted EBITDA margin of 14%-14.5% going forward on a normalised basis. More positively, Grand Lisboa continues to experience good business in July, with revenue of grind mass up 19% year over year, premium mass down 7%, slot surged 78% after reconfiguration of mass gaming floor space, and VIP jumped 44% due to good luck factor.

We have also witnessed similar strong results in SJM's other self-promoted casinos, which registered 33% improvement in adjusted EBITDA, led by better performance of mass market and slot machine operations. In addition, SJM's satellite casinos also seen stronger mass revenue growth compared with VIP revenue growth. Management have rolled out its campaigns to attract grind mass to the other self-promoted casinos and we understand that mass revenue for these casinos was up 24% year over year in July. It appears that SJM's strategy to attract mass players by giving out free vouchers is simple yet cost-effective.
Despite the solid results, SJM is still losing gross gaming revenue market share (currently 15.1% versus 16.7% a year ago) to its competitors due to the lack of presence in Cotai. Management is striving to complete construction of Grand Lisboa Palace in Cotai by end of 2018 with the opening of major elements such as hotel rooms and gaming tables by the second half of 2019. Meanwhile, SJM acknowledge staffing may be an issue and the full opening of retail stores will be slightly delayed. The firm remains optimistic in broadening its customer base with the introduction of new junkets for the Grand Lisboa Palace.