Melco Resorts & Entertainment (NASDAQ: MLCO) should consider divesting its casino properties in Cyprus and Manila to fund a full acquisition of Studio City International (NYSE: MSC) and concentrate on its ambitions in Thailand, according to analyst Vitaly Umansky of Seaport Research Partners.
In a recent report to clients, Umansky highlighted that although Melco’s shares are undervalued, investor sentiment is poor, and that is unlikely to change without decisive actions like asset sales.
Outside of Macau, the Philippines’ City of Dreams Manila continues to generate cash but faces growth challenges due to rising competition in Manila. Cyprus has been disappointing, partly because of conflicts in Russia and Israel, noted Umansky.
City of Dreams Mediterranean is Melco’s casino hotel in Cyprus. Umansky predicts that when Melco reports its fourth-quarter results, likely next month, the company will reveal a loss in market share in Macau during the last quarter of 2024. This could further strain the stock, which has declined 29.20% over the past year and 3.28% year-to-date.
Analyst Recommends Capital Reallocation
Melco currently owns 55% of Studio City, which is the holding company for a Macau integrated resort of the same name.
“Studio City boasts 2,493 luxury hotel rooms, diverse dining options, and approximately 38,500 square meters of retail space,” according to the company’s investor relations website.
Given Melco’s market capitalization of $2.35 billion and Studio City’s market value of $893.61 million as of January 2024, Melco should be able to purchase the remaining 45% of Studio City without significant financial strain. Umansky noted that acquiring Studio City outright could pave the way for a merger with Melco International Development. He previously pitched this idea about three years ago.
“With low valuation and high debt, Melco would be better off selling its Philippines and Cyprus assets and reallocating the capital,” Umansky stated in the report.
Potential Benefits for Melco in Thailand
Selling its casino resorts in Cyprus and Manila could help Melco better focus on its efforts in Thailand. The company recently expressed its intention to bid for a gaming license in Thailand when the government formally approves casino gaming, which is widely expected to happen.
Umansky mentioned that going it alone in Thailand could be financially challenging for Melco, but the company could overcome these challenges by partnering with local firms—a strategy it has employed in other countries.
Melco’s “advantage may lie in its ability to secure a lower capital investment deal with local partners, as it has done in Sri Lanka, potentially in a secondary market in Thailand,” concludes Umansky.
