Premium Mass Demand And Global Resorts Expansion Will Drive Powerful Upside Ahead

Catalysts

About Melco Resorts & Entertainment

Melco Resorts & Entertainment operates premium integrated resorts and casinos across Macau, the Philippines, Cyprus and Sri Lanka.

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

• Acceleration of premium mass demand in Macau, supported by City of Dreams and Studio City upgrades including the new Signature Clubhouse, expanded high limit areas, and refreshed gaming spaces, is positioning Melco to capture higher spend per visitor and structurally lift mass GGR and property EBITDA.
• Macau visitation and GGR normalization beyond peak holiday periods, evidenced by record October mass tables at COD and strong post Golden Week performance, points to a more consistent year round revenue base that may enhance operating leverage and expand EBITDA margins over time.
• Ongoing portfolio optimization, including closing underperforming Mocha venues, reallocating tables and machines to higher productivity locations, and renovating the Countdown Hotel with coordinated retail and F&B upgrades, is expected to drive higher returns on invested capital and support net margin improvement.
• International diversification with fast ramp assets in the Philippines, Cyprus, and the newly opened City of Dreams Sri Lanka creates multiple incremental growth engines that can increase group wide revenue and earnings as these markets mature and premium customers trade up to Melco’s higher end product.
• Disciplined cost management, stable Macau OpEx per day, and a strengthened balance sheet with reduced near term maturities and ongoing deleveraging provide financial flexibility to reinvest in growth projects and potentially resume dividends, supporting earnings growth and shareholder returns.

Assumptions

This narrative explores a more optimistic perspective on Melco Resorts & Entertainment compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts. How have these above catalysts been quantified?

• The bullish analysts are assuming Melco Resorts & Entertainment's revenue will grow by 5.5% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 2.1% today to 9.5% in 3 years time.
• The bullish analysts expect earnings to reach $568.1 million (and earnings per share of $1.45) by about December 2028, up from $104.1 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $337.1 million.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 10.5x on those 2028 earnings, down from 30.0x today. This future PE is lower than the current PE for the US Hospitality industry at 22.3x.
• The bullish 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 a highly competitive, promotion driven market and management repeatedly highlights that margins have not expanded as hoped after the junket collapse. If concessionaires revert to more aggressive reinvestment and marketing to chase weekly market share, operating leverage could be capped and long term EBITDA margins may stagnate or decline, limiting earnings growth.
• The strategy is increasingly skewed to premium mass and high end customers rather than grind mass, which makes results more sensitive to a relatively small cohort of wealthier players and their travel patterns. Any cyclical slowdown in discretionary spending, tighter regulations on cross border gambling or shift in premium play to competing regions could pressure visitation and table volumes, weighing on revenue and net income.
• International expansion into Cyprus and Sri Lanka relies on developing new tourism corridors and attracting higher value guests in markets that are still early stage and exposed to geopolitical tensions and regulatory uncertainty. If tourism growth or premium demand in these regions falls short of expectations, the new integrated resorts may underperform and drag on consolidated EBITDA and returns on invested capital.
• Management is guiding to elevated capital expenditure, around 400 million dollars in 2026 including 125 million dollars for the Countdown Hotel renovation, alongside higher promotional spending and event driven OpEx spikes. If revenue growth normalizes while this investment cycle continues, free cash flow could be constrained and limit the pace of deleveraging and dividend resumption, curbing growth in earnings per share.
• Although Melco has reduced near term maturities and improved liquidity, the group still carries substantial debt and net interest expense is projected at 115 million to 120 million dollars per quarter. If interest rates remain higher for longer or if a Manila asset transaction does not materialize on attractive terms, the interest burden could persist, constraining net margins and diluting the benefit of EBITDA growth to bottom line earnings.

Valuation

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

• The assumed bullish price target for Melco Resorts & Entertainment is $13.0, which represents up to two standard deviations above the consensus price target of $10.92. This valuation is based on what can be assumed as the expectations of Melco Resorts & Entertainment's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
  
• 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 more bullish analyst cohort, you'd need to believe that by 2028, revenues will be $5.9 billion, earnings will come to $568.1 million, and it would be trading on a PE ratio of 10.5x, assuming you use a discount rate of 13.5%.
  
• Given the current share price of $8.01, the analyst price target of $13.0 is 38.4% 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.