Monday, April 05, 2010

Melco Crown Entertainment (NASDAQ:MPEL): Upgrading to Overweight; Upping YE10 Price Target to $7 from $5 - J.P. Morgan

J.P. Morgan is making a significant call on Melco Crown Entertainment (NASDAQ:MPEL) upgrading their rating to Overweight from Neutral and raising their price target to $7.00 (prev. $5.00)

Firm noes their upgrade is based on: 1) MPEL’s leverage to a robust gaming environment in Macau, 2) traction in the mass market gaming business at City of Dreams, which should gradually improve mix/margins at the property, 3) an improving liquidity/covenant situation, 4) achievable/beatable near term and longer term Consensus EBITDA estimates (this is unique relative to MPEL’s history), and 5) a reasonable/inexpensive valuation relative to its Macau operator peers (WYNN/LVS).

Mass market volume at City of Dreams has ramped nicely since the property opened in the 2Q09 and they believe this strength continued in the 1Q10. Recall, following 4Q09 earnings, management noted that January mass market drop was up ~11% sequentially from December. JPM believes this strength has continued through February and March and that hold levels have risen from the 15-17% range (2Q09- 4Q09) to roughly 20.0% for the 1Q10. They find this to be the first sign that the additional hotel capacity at the Hyatt Tower has in fact elongated length of play metrics for the property and as such, hold levels have improved to market norms.

Recall, after reporting lackluster 4Q09 earnings, management noted it was working to get a refinancing completed in the 1H10. They believe discussions have accelerated and are confident MPEL will be able to get a deal done in the 2Q10. As such, JPM model now assumes MPEL issues $400 million of unsecured notes at a rate of 10.5% in the 2Q10, the proceeds of which are used to cover the 3% quarterly amortization of the inexpensive construction facility. Following the issuance, they believe concerns over covenant / restructuring issues will be alleviated and the announcement will serve as a positive catalyst for shares.

JPM now projects 1Q10 net EBITDA, after corporate expense, of $91.4 million, down modestly from their previous estimate of $99.4 million. Their reduction stems from higher than previously anticipated corporate expense ($4.5 mm of delta) and slightly lower than expected VIP hold at City of Dreams (softer hold in March). Our 2010 net EBITDA after corporate expense goes to $334.4 million, up from $329.3 million. Firm notes that their 1Q10 and 2010 EBITDA estimates compare to Consensus EBITDA of $84.4 million and $326.2 million, respectively. As such, they believe this is the first time in as long as they can remember where they felt expectations were achievable and beatable.

At current levels, MPEL trades at 11.0x, 9.9x, and 8.9x JPM new 2010, 2011, and 2012 EBITDA estimates, respectively. Simply put, MPEL has an attractive relative valuation given its closest Macau peers, WYNN and LVS, trade at 13.4x (+240 bps premium to MPEL) and 15.3x (+430 bps premium to MPEL) JPM 2010 EBITDA estimates, respectively.

Notablecalls: MPEL has been a serial disappointer for as long as I can remember. With J.P. Morgan's Gaming team coming out & saying they now think estimates are achievable and even beatable, people will take note.

MPEL has lagged its peers in a major way and today may be time to play ketchup.

I think the will trade over $5 level today with $5.25 not out of the question, if the market plays ball.

The ideal way to play this one would be after open when there is opportunity to get size at a more reasonable price but I'm not entirely sure people will let this one retrace much. When MPEL gets going, it really gets going.

No comments: