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Macau Casinos’ Forward EV/EBITDA Multiple Is Declining Slowly

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Valuation

EV/EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) is often used to value capital-intensive companies. EV is divided by EBITDA.

Macau’s gaming forward EV/ EBITDA multiple has been declining since January 2014. Analysts started to reduce the EBITDA estimates due to key issues in Macau—including the impact of the anti-corruption campaign, tightening of travel visas, and the smoking ban that started in October 2014.

Major casino operators’ share prices—including Las Vegas Sands (LVS), MGM Resorts (MGM), and Wynn Resorts (WYNN)—tumbled by 40%–70% during the year. The EV/EBITDA valuation multiple is expected to remain constrained during the first half of 2015.

The above chart shows that Melco Crown Entertainment (MPEL) experienced the highest decline in its forward EV/EBITDA multiple during 2014. It peaked in January 2014 but declined heavily due to its full exposure to Macau. MGM experienced the lowest decline in the multiples among its peers. MGM has less exposure to Macau—compared to its peers like LVS and WYNN. The VanEck Vectors Gaming ETF (BJK) has holdings in these casino operators.

The average share price declines have been offset by a reduction in the EBITDA estimates for almost all casino operators. As of December 17, 2014, these casino operators traded at an average of 10.2x one year forward EV/EBITDA multiple.

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