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Morningstar | Wynn Sees Macau Demand Rebound in December, Amidst Near-Term Uncertainty; Shares Undervalued

Narrow-moat Wynn Resorts reported 2018 revenue and EBITDA of $6.72 billion (up 11%) and $2.04 billion (up 13%), respectively, near our $6.74 billion and $1.99 billion estimates. As a result, we don't plan a material change to our $161 valuation for Wynn Resorts, which incorporates mid-single-digit average annual sales growth the next five years with operating margins around 21% in 2023 versus 11% in 2018, as we maintain our view that the Macau region (77% of 2018 EBITDA) offers attractive long-term growth. With shares down 40% from the $200 per share level posted in May 2018 on near-term cyclical concerns, we see an opportunity for investors to own a world-class leading casino operator.

Wynn's Macau region reported mostly positive results, with strength at the Palace property offsetting competition and renovation headwinds at the Peninsula property. Combined Macau EBITDA per day reached $4.3 million, well above the disappointing $3.3 million to $3.7 million guidance given on November's earnings call, and the $4.5 million reported in the third quarter of 2018, as December improved from weaker October and November levels and VIP play held better (house was lucky). The Palace resort saw solid VIP and mass volume drop 0.5% and rise 16%, respectively, with occupancy remaining in the high-90% range and average rate up 29%, supporting our view that the region offers attractive long-term demand. In fact, Wynn plans to invest in adding additional rooms and nongaming features with the opening of the Crystal Pavilion around 2020. Meanwhile, the Peninsula property saw its VIP and mass volume drop 18% and rise 0.5%, respectively, as it goes through a near-term transition phase of renovation (that begun last July and will continue through 2019), mix shift to premium mass from VIP (which can aid margins), and faces VIP competition (Wynn is not seeing any change to its commission levels).

While we model for a Macau cyclical downturn in 2019, we believe investors should focus on the long-term opportunity in this market. Macau demand remains robust, evidenced by Chinese visitation growth that accelerated to 14% in 2018 versus the 9% and 0.2% lifts seen in 2017 and 2016, respectively, driven by a growing middle income class, new attractions, and infrastructure improvements. Macau gaming supply is also limited to only six licenses, of which Wynn has one. We think this demand and supply dynamic supports high-single-digit annual industry gaming sales growth over the long term.

The Las Vegas region saw its EBITDA grew 1% in the quarter, as 18% table volume lift and 88.6% occupancy (versus 82.1% in the prior period) benefitted from easy comparisons (last year's terror attack at Mandalay Bay) and a more active convention calendar, offset lower hold (house was unlucky). Wynn also plans to invest into the Vegas region with the opening of new restaurants, convention space, and a golf course in 2020, and at some point, development of 38 undeveloped acres adjacent to its property.

Finally, Wynn continues to expect to open its Encore property in the Boston area this June, despite its license being reviewed by regulators. Due to shift reconstitution of its board and executive team after the allegations against founder Steve Wynn, we expect the company to maintain its license, and see the resort representing around 10% of consolidated 2020 EBITDA (the properties first full year of operation).