Morningstar | SJM’s FVE Maintained at HKD 8.0 After Third-Quarter Results
We have kept narrow-moat SJM’s fair value estimate at HKD 8.0 per share after its third-quarter results and think the shares are undervalued in the long term. Our fair value estimate has incorporated a downturn and license renewal risks in the form of higher gaming tax in the next few years. Management has seen solid month on month improvement in the mass business despite the weaker macro and depreciation of CNY. Our in-house view is that total social financing growth is going to slowdown going forward, and we shall see weaker export and business confidence due to the trade war between the United States and China. We believe that will certainly put pressure on SJM’s earnings. Nevertheless, we adhere to the long-term structural story of Macau gaming and believe SJM will benefit from the opening of Grand Lisboa Palace and the prosperity of Macau in the long run.SJM’s adjusted EBITDA margin in the third quarter was 10.8% versus 11.3% in the second quarter, it was attributed to the Grand Lisboa casino playing unlucky and one-off pension and long service liability. Grand Lisboa’s adjusted EBITDA margin was down 140 basis points to 11.9% due to lower win rate for the VIP and premium mass segment. The self-promoted casino registered strong adjusted EBITDA growth of 21% sequentially, mainly helped by the strong performance of Oceanus casino that benefited from the ramp of the hotel and shopping facilities at Jai Alai. The satellites’ adjusted EBITDA was down 21% sequentially as a result of a HKD 17.5 million one-off pension and long service liability.
Grand Lisboa Palace will complete construction at the end of this year or early next year. Afterward, there will be a five to seven month inspection and approval process by the government. Management hopes to open the property by the end of the third quarter of 2019.
SJM Holdings is an investment holding company based in Hong Kong. Co. is the holding company of Sociedade de Jogos de Macau and is engaged in the development and operation of casinos and related facilities in Macau Special Administrative Region, the People's Republic of China. Co.'s casinos are located in prime locations on the Macau Peninsula and Taipa Island. Gaming operations are comprised of VIP table gaming, Mass Market table gaming and slot machines. Co. is organized in two segments: Gaming Operations (operation of casinos and related facilities); and Hotel and Catering operations (hotel, catering and related services).
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