In a note published this week, Morgan Stanley is projecting softer second-quarter results for Macao casino operators as last year’s base effect continues to distort performance trends for gross gaming revenue (GGR) figures while persistent cost pressures weigh on margins

Following a GGR uptick of 14 percent during the first quarter of the year, the brokerage is forecasting just 4.5 percent growth for the three months ending June, translating into flat industry earnings before interest, taxes, depreciation and amortisation (EBITDA) on an annualised basis, but a 5 percent decline compared to the prior quarter as operating costs remain high.

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Macao gambling stocks have lost more than 15 percent in equity value this year as sell-side analysts have lowered their earnings per share forecasts. 

In his report, casino analyst Praveen Choudhary writes that while valuations remain compelling with the sector trading at 8x EV/EBITDA compared to a medium-term range of 12.5x, investors should expect to see industry numbers trend lower even as reinvestment costs and rebates stabilise. EV/EBITDA is a valuation multiple that compares a company’s enterprise value (EV) to its EBITDA, showing how many times EBITDA investors are paying for the entire business.

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Speaking at the G2E conference last week, the analyst noted that the pivot towards higher-margin players in the premium mass segment has not strengthened the earnings mix given intensifying competition and rising player reinvestments. He also added that industry-wide mass win rates did not improve despite consensus expectations for better win rates coming from side bets and smart tables.

When discussing the competition, Choudhary explained that while the addition of room suites to compete for premium mass customers represented a reasonable strategy, the spending would delay any deleveraging or dividend growth angle, which hinders a recovery in stock prices. Consensus has already cut its EBITDA outlook to $8.4 billion for this year, which is 10 percent lower than the $9.3 billion reported in 2019 despite a full recovery in tourism.