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Melco facing near term headwinds, but undervalued

While Melco has been experiencing weaker than expected ramp up at City of Dreams and Studio City, Bernstein analysts believe the stock to be undervalued compared to the other operators in Macau.

On Melco’s 18Q3 performance, Bernstein noted that mass at City of Dreams has been trending lower than expected while Studio City’s mass and VIP ramp-up has been trending lower as well. In addition, with the company set to a pay a 14-month bonus, the brokerage says it estimates a US$30 million hit to EBITDA in 18Q3.

In the medium term however, Bernstein said that Melco may benefit from its acquisition of the remaining shares of Melco Philippines, as well as potential clarity around the Studio City IPO.

Looking at stock performance, Bernstein believes Melco to be an undervalued stock.

Based on Bloomberg average, the stock is currently at 8.0x EV/NTM EBITDA, a wide 21 percent discount to the Macau Group, which historically, was only discount of 8 percent.

“While we forecast MLCO to achieve 6 percent '17-'22E revenue CAGR and EBITDA CAGR of 11 percent (slightly below Macau market's 13 percent EBITDA CAGR), the valuation discount is too severe,” said the brokerage.

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