Premium Mass Recovery And Global Diversification Will Drive Long-Term Earnings Power

Catalysts

About Melco Resorts & Entertainment

Melco Resorts & Entertainment operates integrated casino resort destinations focused on premium mass and high end entertainment customers across Asia and Europe.

What are the underlying business or industry changes driving this perspective?

• Ongoing recovery and expansion in Macau gaming visitation, combined with record mass tables GGR at City of Dreams and disciplined reinvestment, may support sustained top line growth while allowing EBITDA margins in Macau to trend higher over time, affecting revenue and earnings.
• Premium mass focused upgrades such as the Signature Clubhouse, expanded high limit areas and new private salons at Studio City are deepening wallet share among higher value customers, which is likely to influence yield per visitor and property EBITDA and net margins.
• Global diversification with ramping properties in the Philippines, Cyprus and the newly opened City of Dreams Sri Lanka is creating multiple incremental earnings streams that are less dependent on a single jurisdiction, which may support smoother consolidated revenue trends and more resilient free cash flow.
• Balance sheet changes through sizeable debt repayments, early redemption of 2026 notes and opportunistic share repurchases are reducing interest expense and share count, which may affect earnings per share and equity value alongside cash generation.
• Planned capital investments, including the Countdown Hotel renovation and concurrent upgrades to retail and food and beverage, are expected to influence non gaming spend and length of stay, which may diversify revenue mix and provide operating leverage that affects EBITDA and net income.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Melco Resorts & Entertainment's revenue will grow by 4.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 2.1% today to 7.7% in 3 years time.
• Analysts expect earnings to reach $438.0 million (and earnings per share of $1.08) by about December 2028, up from $104.1 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $561.5 million in earnings, and the most bearish expecting $333.2 million.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 11.5x on those 2028 earnings, down from 31.2x today. This future PE is lower than the current PE for the US Hospitality industry at 24.8x.
• Analysts expect the number of shares outstanding to decline by 6.92% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 13.46%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Macau remains an intensely competitive premium mass market. If rivals push reinvestment and promotions higher than expected, Melco may be forced to sacrifice pricing discipline to defend share, which could cap long-term margin expansion and pressure EBITDA and net income growth.
• The strategy is increasingly concentrated in premium and high-end mass players rather than broad-based grind mass. Any cyclical pullback in spending by a relatively small set of affluent customers, or regulatory constraints on high rollers, could create outsized volatility in gaming volumes and lead to weaker revenue and earnings.
• New markets such as Sri Lanka and the continued ramp in Cyprus and the Philippines depend on tourism and regional stability. Prolonged geopolitical tensions, slower outbound travel from key source markets, or regulatory changes could limit the expected diversification benefits and weigh on consolidated revenue and property EBITDA.
• Despite recent deleveraging, the group continues to carry substantial debt and is planning sizeable capital expenditure on projects like the Countdown Hotel and broader upgrades. A downturn in regional gaming demand or higher-for-longer interest rates could strain free cash flow, constrain shareholder returns, and reduce net income via elevated interest expense.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of $10.92 for Melco Resorts & Entertainment based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $13.0, and the most bearish reporting a price target of just $8.5.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be $5.7 billion, earnings will come to $438.0 million, and it would be trading on a PE ratio of 11.5x, assuming you use a discount rate of 13.5%.
  
• Given the current share price of $8.32, the analyst price target of $10.92 is 23.8% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.