Analysts at Goldman Sachs are calling MGM (NYSE: MGM) capital raise announcement after the close A "strategic positive" as it will reduce net debt to EBITDA.
The firm believes the equity issuance and the sale of Borgata provides some relief on balance sheet concerns. "We estimate the roughly $1 billion in combined proceeds reduces the 2010E net debt to EBITDA ratio from 9.7X to 8.8X," the firm states.
"For investors who wanted the best way to invest in the Las Vegas convention and leisure recovery but stayed away due to balance sheet risk, this capital raise resolves some of these fears," Goldman said.
Goldman also called the Q3 operating results "solid" and they support their view that MGM is making progress on EBITA recovery.
Other catalysts that could move shares shares higher are ahead, including the 2010 IPO of its Macau casino which is still on track, the firm notes.
The firm maintained their Buy rating and $14 price target on MGM.
JPM's take: Click to enlarge
6 comments:
why is the stock halted ?
probably because they wanted to get out th eprice of the offering $12.65--stock here at 12.26 can be bought
probably because they wanted to get out th eprice of the offering $12.65--stock here at 12.26 can be bought
ubs
␣ Today’s Offering Not As Dilutive to Our $12 PT We had viewed Aug market results from Las Vegas (released last Friday) as
encouraging, but had been concerned about the potential for dilution from an
equity offering as MGM addresses its leverage issues. Interestingly, the potential dilution from today's announcement is not as negative as we had feared, but the preliminary Q3 results are worse than expected. Even at a 20% discount to MGM's closing price on Tuesday, this 40.9 mill new share offering would not be dilutive to our $12 target given the stock's 16% trade up in the last 3 sessions.
␣ MGM Q3 Results Disappoint Q3 results indicate that RevPAR declined 2% rather than stabilizing, as we had expected and gaming revs declined 9% vs. the 1% decline that we had estimated.
␣ Removing Near-Term Balance Sheet Risk Thru 2012 Depending on where the offering is priced, we believe the offering could raise approx. $500M. Together with its existing liquidity, the potential of $300-400M in proceeds to MGM from a Hong Kong IPO, $250M from sale of its 50% Borgata stake, $114M in Borgata trust & $71M from Borgata land sale, MGM has liquidity to get through 2012, a long runway to allow for cash flow to show some recovery.
␣ Valuation: 12 month Price Target of $12
Our MGM PT of $12 is based on PV of ~9-10x 2012E U.S. EBITDA, ~12x Macau EBITDA, land value and our estimate of proceeds from sale of Borgata interest
bac
Preannounces 3Q and liquidity initiatives MGM preannounced 3Q results and initiatives incl: 1) issuing 41M shrs (est. ~$500M in net proceeds), 2) a Borgata offer ($426M total), and 3) Macau loan repayment ($125M). In total these could raise ~$1B, which should improve MGM’s liquidity cushion through 2012. While we think MGM could have raised more, the moves are clearly a step in the right direction to fixing the bal. sheet.
Liquidity initiatives are positives
MGM is issuing 41M shares (9% dilution) and Kirk Kerkorian is also selling another 28M shares. We est. MGM will receive ~$500M in net proceeds, a positive for the balance sheet. Also, MGM has an offer for its Borgata stake valuing it at $100-200M more in proceeds than we originally thought. The offer is a positive, but is non-binding, subject to diligence and timing remains uncertain. The Macau loan repayment is a near-term positive as well, but it feels to us like it’s just pulling forward some of the eventual IPO proceeds.
Q3 results look light on the back of Friday’s numbers
Total 3Q EBITDA is $280M (down 28% Y/Y) vs. our $315M/$302M consensus. Strip metrics were light: RevPAR -2% vs. our +3%, gaming revs -9% vs. our -4%, and margins of 21% vs. our 23%. CityCenter inflected to positive EBITDA, but still lost $2M ex. hold. These numbers mostly trail the market averages we saw on Friday for slot drop, table drop and RevPAR, and support a slower recovery.
Improves liquidity thru 2012, but still betting on recovery
We now estimate MGM has $3.0B in uses (debt maturities/CC funding) vs. $2.1B of sources (including cash, credit facility, equity raise, etc.) through 4Q12, which should be sufficient liquidity when combined with existing cash/revolver capacity to get through 2012. Leverage remains high (8x net leverage proforma ‘11E vs. 9x prior) and FCF remains negative, meaning deleverage is still mostly depending on
␣a large macro recovery. Our updated liquidity analysis is in Table 2 on page 3.
3Q gaming preview: But is it sustainable? Following Friday’s big Las Vegas numbers, there seems to be one question on investors’ minds: “Is this sustainable?” We don’t know what’s more indicative, the numbers themselves or that it seems people are so afraid to miss “the turn”. Inside we take a closer look at all the LV trends, so you can see exactly what is going on. Long story short, we think there will be at least 2-3 more months (and maybe as many as 6) of good data coming out of Vegas. While this may not be “sustainable”, it should increase conviction of bulls, and squeeze the shorts.
Las Vegas: Should stay good for a few months, get ready
Business travel is back plus we think baccarat play in Sep/Oct is solid, so good headlines should stick around until at least December. There are 3 indicators we see as important in gauging “core” Las Vegas: 1) RevPAR, which should inflect to positive in Q3, 2) slot drop, improving slowly but still negative, and 3) gaming win/visitor excl. baccarat (stuck at ~$120, down -29% from late ’06 peak of $169). All suggest the consumer here is still spending less, period. So all signs point to this not being a step function, but it being a slower, tepid consumer recovery.
Another record in Macau: +50% for 2010
We already raised Q3 numbers for LVS and trimmed WYNN slightly on 9/28, and are update our MGM model (as a result we are raising our PO from $13 to $15). Early Golden Week trends sound impressive, with reports indicating volume in the first 10 days of Oct. at $1.1B or MOP8.5B. Assuming a daily rate for the balance of Oct. similar to that of Sept., full month revs could hit a new record. If Nov./Dec. run similar to 3Q, 4Q could grow +34% Y/Y. Margins will matter in Q3 given price- war concerns, but we think ‘11 ests could still be conservative.
Singapore: Two stats that matter
Two data points should matter out of Singapore this quarter: 1) the absolute level of EBITDA for Marina Bay/Genting Singapore (we’re at $198M for MBS) and its implications for 2011E and 2) the run-rate of gross gaming revenues per day. Our model is predicated on revenue/day of $5.4M in 2011. We think buyside expectations imply something in the $6.0-6.5M per day range.
Regionals: Tables boosting PENN, but trends remain choppy
PENN will benefit in Q3 from the opening of Pennsylvania and WV table games, and we are raising numbers. We think this is mostly anticipated given the first two months of table data out of those markets, but with a likely guidance increase it could still be viewed favorably. We think margins/expense control should help PNK beat slightly (we’re at $54M vs. $51M Street), but top-line trends across regions remain choppy at best. Total U.S. regional gaming revenues ex. LV Strip and AC are trending -1% in 3Q to-date vs. -1% in 2Q. We are raising our ASCA PO from $17.50 to $18; 8x our ‘11E EBITDA.
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