Global Gaming and Casinos Industry Specialist, Casino Business Review LLC

Howard J Klein

Global Gaming and Casinos Industry Specialist

Equity Bottom-Up

MGM Resorts International / Equity Bottom-Up

<ul>
<li>The US and Macau casino operator and its Japanese partner Orix Corporation may face tough odds to produce a viable ROI in a project that could reach over US$10b when done.</li>
<li>The Osaka casino resort will be the single most expensive IR ever built. Cost overruns historically are significant.</li>
<li>MGM shares could see a spike when officials announce winning bids by Spring or before. MGM is the only bidder left for Osaka.</li>
</ul>


The US and Macau casino operator and its Japanese partner Orix Corporation may face tough odds to produce a viable ROI in a project that could reach over US$10b when done.
The Osaka casino resort will be the single most expensive IR ever built. Cost overruns historically are significant.
MGM shares could see a spike when officials announce winning bids by Spring or before. MGM is the only bidder left for Osaka.


MGM's Osaka IR Aims at a US$9b Cost with Initial US$2.5b. It Might Be a Bridge Too Far

Pan-Asia Catalysts/Events, Quiddity Advisors

David Blennerhassett

Pan-Asia Catalysts/Events

Quiddity Advisors

Event-Driven

Melco International Development / Event-Driven

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<p>This week in StubWorld ...</p>
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<div class="content-highlight">
<p><a href="https://www.smartkarma.com/entities/melco-international-development-ltd" target="_blank" data-smartkarma-citation="entities:809:1" rel="noopener">Melco International Development (200 HK)</a>'s has bounced off its all-time low NAV discount and implied stub back in March, and is now back to +2 STD levels. </p>
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<p>Preceding my comments on Melco are the weekly setup/unwind tables for Asia-Pacific Holdcos.</p>
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<p>These relationships trade with a minimum liquidity threshold of US$1mn on a 90-day moving average, and a % market capitalisation threshold - the $ value of the holding/opco held, over the parent’s market capitalisation, expressed in percent - of at least 20%.</p>
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<p>As always, more below the fold.</p>
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This week in StubWorld ...




Melco International Development (200 HK)'s has bounced off its all-time low NAV discount and implied stub back in March, and is now back to +2 STD levels. 




Preceding my comments on Melco are the weekly setup/unwind tables for Asia-Pacific Holdcos.


These relationships trade with a minimum liquidity threshold of US$1mn on a 90-day moving average, and a % market capitalisation threshold - the $ value of the holding/opco held, over the parent’s market capitalisation, expressed in percent - of at least 20%.


As always, more below the fold.


StubWorld: Lock In Profits As Melco's NAV Discount Narrows

TMT & Consumer Independent Equity Research Analyst, Obex Capital Research

Aaron Gabin

TMT & Consumer Independent Equity Research Analyst

TMT & Consumer Independent Equity Research

Obex Capital Research

“Obex” is Latin for Barriers to Entry. Obex Capital Management’s investment philosophy is driven by an intense focus on which business model’s Barriers to Entry are able to withstand the ever increasing competitive disruption in the TMT and Consumer Sectors.

<p>Last week, New York Governor pointed towards legalizing online gambling to try to plug the budget gaps that COVID has blown open. He wants to raise $500M in revenues annually. We don't think he will get there, but we do think NY is a $700M TAM.</p><p>At $52, is it time to re-engage on Draft Kings even after an 11% rally?</p><div class="content-highlight"><p>Obex’s fundamental research process is focused on secular change in the TMT and Consumer sectors. We seek to differentiate between fundamental business analysis and security analysis. Before deciding if a security’s pricing and positioning merit a long or short position, we analyze the four pillars of business fundamentals (Secular Factors, TAM, Competitive Advantage, Business Model) in order to determine if this is a “good” or “not so good” opportunity.</p></div>

Last week, New York Governor pointed towards legalizing online gambling to try to plug the budget gaps that COVID has blown open. He wants to raise $500M in revenues annually. We don't think he will get there, but we do think NY is a $700M TAM.At $52, is it time to re-engage on Draft Kings even after an 11% rally?Obex’s fundamental research process is focused on secular change in the TMT and Consumer sectors. We seek to differentiate between fundamental business analysis and security analysis. Before deciding if a security’s pricing and positioning merit a long or short position, we analyze the four pillars of business fundamentals (Secular Factors, TAM, Competitive Advantage, Business Model) in order to determine if this is a “good” or “not so good” opportunity.

NY State To Legalize Gambling, Double Down on DraftKings?

Technical Analyst, Vermilion Research

Joe Jasper

Technical Analyst

Technical and Quantitative Research

Vermilion Research

Vermilion’s objective is to deliver timely, actionable, and unique technical research to professional investors through the application of our various technical indicators.

Our research strategists seek to highlight securities which we believe are at major inflection points, based on our various technical and quantitative indicators, and offer asymmetric risk/return profiles. Our unique research methodology, centered on relative strength, enables our strategists to deliver superior investment recommendations.

Our process begins by organizing the universe of actively traded stocks into discrete sectors, then into industry groups. We then apply our technical and quantitative tools to identify developing price trends. Once attractive trends are identified within a selected sector or group, we screen for individual stocks which we believe offer the best risk/reward profile. We provide a historical perspective that often reveals, through our long-term charts, how price patterns often repeat themselves over time.

Technical Analysis

<p>Jitters over today’s Georgia Senate runoff elections led to mild weakness on the first trading day of the year. As we explain below, this appears to be just a blip on the radar and our bullish outlook remains intact. We continue to view any weakness as a buying opportunity. In today’s report we highlight attractive Groups and stocks within Consumer Discretionary and Materials: Casinos &amp; Gaming, Large-Cap, Copper, Gold, Western Hemisphere, Large-Cap, and Silver, Platinum.</p>

Jitters over today’s Georgia Senate runoff elections led to mild weakness on the first trading day of the year. As we explain below, this appears to be just a blip on the radar and our bullish outlook remains intact. We continue to view any weakness as a buying opportunity. In today’s report we highlight attractive Groups and stocks within Consumer Discretionary and Materials: Casinos &amp; Gaming, Large-Cap, Copper, Gold, Western Hemisphere, Large-Cap, and Silver, Platinum.

U.S. Equity Strategy: Bullish Outlook Intact

European Event-Driven Analyst

Jesus Rodriguez Aguilar

<p>On 4 January <a href="https://www.smartkarma.com/entities/entain-plc" target="_blank" data-smartkarma-citation="entities:23926:1" rel="noopener">Entain (ENT LN)</a> (formerly GVC Holdings) confirmed in a <a href="https://entaingroup.com/newsrelease/statement-in-response-to-press-speculation/" target="_blank" rel="noopener">statement</a> that it had received proposals from <a href="https://www.smartkarma.com/entities/mgm-resorts-international" target="_blank" data-smartkarma-citation="entities:16227:1" rel="noopener">MGM Resorts International (MGM US)</a> regarding a possible offer. The combination could create an operator with a large both online and physical presence through retail shops and casinos.</p>
<ul>
<li>The last offer has been <strong>0.6 MGM US x 1 ENT LN</strong>.</li>
<li>
<p>Based on closing prices on 31 December 2020 (last trading day prior to the announcement), the proposal represents <strong>1,383p</strong> per Entain share.</p>
<ul>
<li>Valuing the equity of Entain at c. <span title="Share Price as of Dec-31-2020 FY: 2020 Period End Date: Jun-30-2020 Period Type: LTM Value: £ 11.34, Currency: GBP">£8,092 mn, i</span><span title="Share Price as of Dec-31-2020 FY: 2020 Period End Date: Jun-30-2020 Period Type: LTM Value: £ 11.34, Currency: GBP">mplied EV of c. £10,206.2 mn and </span>a premium of 22% to Entain’s share price.</li>
<li>13x EV/Fwd EBITDA.</li>
</ul>
</li>
<li>
<p>Entain's shareholders would own approximately 41.5% of the combined company.</p>
</li>
</ul>
<p>The shares of Entain closed on 4 January at 1,420p, 25.3% higher than the previous close.</p>
<p>The move comes just a few months after Entain’s UK rival William Hill agreed to be taken over by its Las Vegas-based partner Caesars Entertainment. Entain shares shot up 25% over 2020, and if that rally continues, MGM or any other prospective buyer would be forced to pay up for Entain.</p>
<p>The key is the <strong>valuation of BetMGM</strong> and its future prospects in a in a very competitive market populated by deep-pocketed players.</p>
<p>The proposed offer price represents c. 8.0-9.0x trailing EBITDA, vs. 10.0x for comps and c. £3.5 bn for the stake in BetMGM.</p>
<ul>
<li>This offer, as the Board says, seems to undervalue the business.</li>
<li>I view MGM's move as an opening gambit, and believe there is room to sweeten the offer.</li>
</ul>
<p>By using the median of comparables 14.6x EV/Fwd EBITDA, the <strong>implied valuation for Entain would be 1,537p</strong>.</p>
<ul>
<li>This is 11% above MGM's offer.</li>
<li>Let us keep in mind that BetMGM does not currently contribute to the bottom line, for now, it is a <em>wild card</em>.</li>
</ul>
<p>By using Entain's projections for the US ($20.3 bn by 2025, and expected market share 15-20%), I will use the mid point, 17.5% share for a total revenue of $3.55 bn by 2025. By applying a 2.8x EV/Fwd Revenue multiple, in a blue sky scenario, the valuation of the JV could reach $9.94 bn, of which $4.97 bn for Entain (equivalent to <span title="Share Price as of Dec-31-2020 FY: 2020 Period End Date: Jun-30-2020 Period Type: LTM Value: £ 11.34, Currency: GBP">£</span>3,658 mn, not too far away from MGM's implied valuation, or <strong>625p per share</strong>).</p>
<p>Therefore my valuation for Entain would be between the base case of 1,537p and 2162p. Taking the <strong>mid point</strong> would give a longer-term <strong>TP of 1,850p</strong>.</p>
<p>Recommendation is <strong>LONG Entain</strong>, or set up the spread in the usual way, although the offer is likely to improve. I would not rule out a dawn raid by private equity.</p>
<p>By using the last closing price of MGM, the shares of Entain are trading 6.9% above the indicated terms.</p>

On 4 January Entain (ENT LN) (formerly GVC Holdings) confirmed in a statement that it had received proposals from MGM Resorts International (MGM US) regarding a possible offer. The combination could create an operator with a large both online and physical presence through retail shops and casinos.

The last offer has been 0.6 MGM US x 1 ENT LN.

Based on closing prices on 31 December 2020 (last trading day prior to the announcement), the proposal represents 1,383p per Entain share.

Valuing the equity of Entain at c. £8,092 mn, implied EV of c. £10,206.2 mn and a premium of 22% to Entain’s share price.
13x EV/Fwd EBITDA.



Entain's shareholders would own approximately 41.5% of the combined company.


The shares of Entain closed on 4 January at 1,420p, 25.3% higher than the previous close.
The move comes just a few months after Entain’s UK rival William Hill agreed to be taken over by its Las Vegas-based partner Caesars Entertainment. Entain shares shot up 25% over 2020, and if that rally continues, MGM or any other prospective buyer would be forced to pay up for Entain.
The key is the valuation of BetMGM and its future prospects in a in a very competitive market populated by deep-pocketed players.
The proposed offer price represents c. 8.0-9.0x trailing EBITDA, vs. 10.0x for comps and c. £3.5 bn for the stake in BetMGM.

This offer, as the Board says, seems to undervalue the business.
I view MGM's move as an opening gambit, and believe there is room to sweeten the offer.

By using the median of comparables 14.6x EV/Fwd EBITDA, the implied valuation for Entain would be 1,537p.

This is 11% above MGM's offer.
Let us keep in mind that BetMGM does not currently contribute to the bottom line, for now, it is a wild card.

By using Entain's projections for the US ($20.3 bn by 2025, and expected market share 15-20%), I will use the mid point, 17.5% share for a total revenue of $3.55 bn by 2025. By applying a 2.8x EV/Fwd Revenue multiple, in a blue sky scenario, the valuation of the JV could reach $9.94 bn, of which $4.97 bn for Entain (equivalent to £3,658 mn, not too far away from MGM's implied valuation, or 625p per share).
Therefore my valuation for Entain would be between the base case of 1,537p and 2162p. Taking the mid point would give a longer-term TP of 1,850p.
Recommendation is LONG Entain, or set up the spread in the usual way, although the offer is likely to improve. I would not rule out a dawn raid by private equity.
By using the last closing price of MGM, the shares of Entain are trading 6.9% above the indicated terms.

United States

MGM Resorts International operates gaming, hospitality and entertainment resorts.  The Company owns properties in Nevada, Mississippi and Michigan in the United States; and owns interests in properties in Nevada and Illinois in the United States, and Macau. MGM Resorts also offers hospitality management services for casino and non-casino properties around the world.

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MGM Resorts International (MGM US)

MGM's Osaka IR Aims at a US$9b Cost with Initial US$2.5b. It Might Be a Bridge Too Far

MGM/Orix partnership is likely to win Osaka IR license. Sunk cost may be much higher than anticipated, but news of approval next spring could spike...

Howard J Klein

StubWorld: Lock In Profits As Melco's NAV Discount Narrows

If you had set-up Melco - Long Melco and Short MLCO - I'd unwind that trade. I'd be inclined to reverse the stub here - Short Melco and Long MLCO.

David Blennerhassett

NY State To Legalize Gambling, Double Down on DraftKings?

After New York's Governor signaled he would legalize gambling, we revisit our previous bullish thesis on DraftKings to see if now is the time to re...

Aaron Gabin

U.S. Equity Strategy: Bullish Outlook Intact

mild weakness on the first trading day of the year appears to be just a blip on the radar and our bullish outlook remains intact. We continue to...

Vermilion Research

MGM's Prospective Offer for Entain

MGM's offer, an opening gambit, seems to undervalue ENT. Key is the valuation of BetMGM. My valuation for ENT ranges between 1,537p and 2162p. Mid...

Jesus Rodriguez Aguilar

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