Diversification to “future proof” Melco: MS

Melco Resorts & Entertainment’s diversification away from its home base of Macau will help to “future proof” the company and help its EBITDA to outperform peers, according to analysts at Morgan Stanley.

Answering frequently asked questions by shareholders, the firm points out that in the past five years EBITDA from the Philippines has grown faster than Macau and generated a return on invested capital of 25 percent.

Melco owns the City of Dreams Manila and is building an integrated resort on Cyprus, where it has a monopoly license. It also recently bought an almost 20 percent stake in Australia’s Crown Resorts and is seeking a license in Japan. 

“As to the conglomerate discount, LVS’ global gaming business does not result in a discount, and we expect MLCO to have a controlling stake in Crown in time,” the firm said. 

Morgan Stanley said factors that could reduce the stock trading discount to its peers include buying out minority interests in its Studio City resort, repatriation of cash flow from the Philippines and buying a controlling stake in Crown. 

The note cautioned however, that after having returned more than 45 percent of its market cap over the last three years, the dividend may be capped in the near term, which won’t help the share price. 

Morgan Stanley expects Melco and MGM China to post the highest growth in EBITDA in 2019.