Description
MGM is trading at a significant discount to intrinsic and historical value. In the last 9 months, the company has executed on efforts to grow earnings, reduce leverage, and unlock the value of its real estate, which has resulted in an equity that is implicitly valued at 8x 2016 EBITDA and 6.6x 2017 EBITDA.
This is a massive discount compared against historical valuations of Vegas assets for 10-12x, and even more striking when considering recent transactions in the Vegas market have been significantly higher (Blackstone bought Cosmopolitan for 17x in 2014, and Vegas locals assets have traded for as high as 22x in the last month).
MGM Resorts is worth $28-33/share and potentially more when considering the various options the company has at its disposal to monetize current and future projects.
MGM Brief Overview
MGM is an operator of casino & hospitality assets globally. The company owns, or owns an interest, in 19 properties plus 3 currently in construction.
Most recently, MGM completed an IPO of a REIT subsidiary, from which the company leases 10 properties from. Wholly owned earnings, therefore, consist of both earnings from the wholly owned assets as well as earnings after rental payments from the leased properties, which I will refer to as MGM Opco.
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Entity
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MGM Resorts Int’l
Ownership %
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Properties
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MGM Wholly Owned Resorts
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100%
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Bellagio, MGM Grand, Circus Circus (in construction: MGM National Harbor, MGM Springfield)
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MGM Growth Properties (73% owned by MGM Resorts)
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73%
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Mandalay Bay, Mirage, Luxor, New York-New York, Excalibur, The Park, MGM Grand Detroit, Beau Rivage, Gold Strike Tunica)
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City Center
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50%
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Aria, Mandarin Oriental Las Vegas, Vdara, Veer
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Borgata
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50%
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Borgata
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Grand Victoria
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50%
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Grand Victoria
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MGM China
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51%
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MGM Macau (in construction: MGM Cotai)
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Valuation
MGM should be valued on a Sum of the Parts basis given the company’s diverse asset base and ownership structures. Another way of saying this is that MGM’s market capitalization of $12.39bn should include their proportionate share of equity value in the company’s various JV entities. Accounting rules for consolidation, however, mask the hidden value embedded in MGM Resorts.
· MGM Growth Properties and MGM China are both publicly traded entities, and therefore have directly observable indications of valuations.
o MGP (ticker MGP) has a market capitalization of $4.95bn, which implies $3.61bn of value is attributable to MGM Resorts Int’l for its 73% ownership stake
o MGM China has a market cap of $5.02bn in USD terms, which implies $2.56bn of value is attributable to MGM Resorts Int’l for its 51% ownership stake
· CityCenter is a non-publicly traded entity with run rate EBITDA of $360mm and $1.14bn of net debt. Assuming a 12x EBITDA multiple which is consistent with valuations for luxury Vegas assets implies ~$1.59bn of value is attributable to MGM Resorts Int’l for its 50% stake.
· Borgata is a non-publicly traded entity with run rate EBITDA of $205mm and $621mm of net debt. Assuming an 8x EBITDA multiple which is consistent with regional destination assets implies $612mm of value is attributable to MGM Resorts International for its 50% stake.
· MGM is also in construction for 2 projects – expectations for EBITDA range from $320-360mm, and at an 8x valuation multiple imply roughly $900mm of embedded future equity value in MGM’s market capitalization
Putting it all together:
· The public market’s valuation of MGM’s Wholly owned assets and MGM Opco therefore is the current market cap of $12.37bn less the company’s proportionate share of equity in JV entities, which computes to $3.1bn for MGM Wholly Owned + MGM Opco
· MGM has gross debt outstanding of $7.6bn and cash of $1.6bn
· This implies a TEV of $9bn for Wholly Owned MGM and MGM Opco
· MGM’s Wholly Owned EBITDA and MGM Opco EBITDA is estimated to be $1.14bn in 2016
· This implies a valuation for MGM Wholly Owned and MGM Opco of 8x 2016 EBITDA. Running this same analysis on 2017 estimates implies a valuation of 6.6x EBITDA.
· A fairer multiple of 11x would imply $28-33/share on MGM Resorts International or 28-52% upside.
I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise do hold a material investment in the issuer's securities.
Catalyst
MGM is also addressing it’s balance sheet, and is on track realizing an Investment Grade credit rating within 2 years. Most recently, MGM received a two notch upgrade to Ba3 from Moody’s following the MGP IPO and Crystals sale. This is just the beginning of a series of transactions MGM will undertake with MGP as the company has been very clear that they intend to sell the two regional properties under development to MGP once opened which will be immediately deleveraging to MGM.
MGM is also in the early innings of a Profit Improvement Plan which will boost earnings in 2016 and 2017. In 1Q16, the company reported a 24% yoy improvement in EBITDA, and we should expect this type of earnings growth to continue in the near term.
Lastly, the company is aware of the wide disconnect in valuation, and is certain to address this as well as the goal of reducing leverage at the upcoming Analyst Day in June.