THE EDGE HIGH CONVICTION IDEA: MSGE
Basketball starts up next week (July 30, 2020) and the return of live sports is ongoing through to the end of the year, and Madison Square Garden Entertainment Corp. (MSGE) is an immediate beneficiary to this reopening - making it imperative that investors get involved now ahead of the asset valuation gap closing. The major long-term catalyst is of course the completion and opening of the MSG Sphere in Las Vegas, to be the Mecca of e-sports and live music entertainment.
What's Happening? The Edge Intelligence...
With the NBA finally making a comeback starting next week (July 30, 2020) and the NHL from August 1, 2020, we believe The Garden and other MSGE venues will begin opening up in the next 3 to 5 months. Given how the pandemic saw seasons cut short and venues have been empty the past few months, MSGE has fared relatively well, returning +11% since its listing on April 20, 2020, compared to the S&P 500 Index returning +15% to date. Looking ahead, we believe there is extensive unlocked value for shareholders as the venues resume regular operations through the second half of the year.
Currently trading at $72.50, MSGE is still trading at a huge 55% discount to its net asset-based valuation of $3.9bn, as MSGE’s market cap is now $1.7bn. Considering MSGE’s net cash balance of $1.4bn (as of May 1, 2020), the market seems to only be assigning $300m in valuation to MSGE’s iconic assets like Madison Square Garden (12 acres of land worth $1.2bn), air rights (worth $348m), the Christmas Spectacular (valued at $300m), Tao Group’s 77.5% stake valued at $335m, etc. Taking those valuable holdings into account, even after applying a 40% discount to the company’s asset-based valuation, our one-year Base case target price comes to $94.73, indicating a potential upside of +31% from current levels.
The Sphere, a Modern Venue in the Making...
As the Madison Square Garden Arena is known as the Mecca for basketball, James Dolan is designing a first-of-its-kind fully immersive experience on a grand scale in the form of a $1.66bn venue in the heart of Las Vegas (next to the Venetian Resort), the 18,000-seat arena called The Sphere, now expected to start operations in late 2022 (originally targeted for opening in the beginning of 2021). We expect The Sphere to emerge as a best-in-class major venue for music concerts, e-sports and gaming events, potentially generating $300 to $500m in revenues for MSGE annually in the initial years of operations (2022 onward).