Archive for October, 2010
Melco Crown Entertainment (MPEL)
Our Top Macau Pick
Growth catalysts — The opening of Galaxy Macau in early 2011 and SCL’s Sites 5 & 6 in early 2012E should increase CoD/Cotai visitation. Further, the new light rail system (to be completed in 2014) and extended hours at the Lotus bridge entry point will also drive Cotai traffic down the road.
Mass market growth — Mass market growth is a key objective as mgmt believes it can further increase drop at CoD. Accordingly, it is aggressively working to improve relationships with local/regional tourism/transportation providers to promote MPEL’s product and increase footfall.
New Options Create Additional Long-Term Upside to CoD — According to local press, MPEL reached a deal with the Macau government for unused land adjacent to CoD. Under the announced terms, MPEL will spend some US$30m for rights to alter design for the towers planned at the northern end of CoD. As a result, MPEL can potentially now add up to 42% more space into its planned five-star hotel and about 32% into its apartment-hotel.
Over the CapEx Hump; Now Focused on Operations — While the design option may eventually lead to yet another increase in CapEx down the road, with the opening of House of Dancing Water (which premiered last evening), MPEL is now over its current CapEx hump. Meanwhile, the other major Cotai players, Sands China and Galaxy, still have additional CapEx as well as ‘launch’ risk associated with their new untested properties. For now, we expect MPEL’s new management team to focus on improving the existing operation (following teething pains at the outset).
3Q Preview; Raising Forward Estimates — To reflect our latest channel checks, we have raised our continuing 3Q EBITDA estimate to US$113m (from US$99m previously), 15% above Consensus of $98.5m. We note some modest pre-opening expense associated with the new House of Dancing Water in the period. We also increased our FY11-12 EBITDA estimates by 10% and 13% each to US$489m and US$537m.
Raising TP to US$7.50 — We value MPEL at +1 std above its average EV/EBITDA multiple (equating to 14.4x) blended with our DCF NPV. As a result, we have raised our TP by 32% to US$7.50 from US$5.70, implying 29% upside.
Art Cashin, UBS:
Speculating On Terror – In the days after the 9/11 attacks, there was much speculation around the U.S. as to whether there would be another “event”. What shape would it take? When might it occur? One of the consequences was the “Halloween note” rumor.
A story swept the nation that a young lady had been dating a young man from Saudi Arabia. On the afternoon of 9/11, she reportedly returned to their apartment to find the young man, and his belongings gone. The only thing she found was a note.
Supposedly, the note expressed his love, said he could not explain what was going on and said they might not meet again. But, because he loved her, he begged that she not go out in public on Halloween. The story of the note went viral and swept the nation via email.
At the time, we pointed out the long history of such stories in fearful societies. By signaling out a specific date – Halloween – it removed the “randomness” of the potential threat. If you believed the story, you would be safe until Halloween. And, if you stayed home, you’d be safe – even then.
According to the buzz we’re hearing, a new speculation on terror may be evolving. We suspect that the seed may come from warnings from the authorities that a future attack might be “Mumbai style”. That reintroduces a sense of randomness. You’re not safe by staying out of airports or tall buildings. You’re not sure what will be safe.
Apparently, folks are trying to address the Mumbai style randomness by finding an anchor or a signal. The speculation has seized on the botched car bombing in Times Square. It has been merged into a new theory that car bombings or car fires will be used a diversion. They can attract large crowds – fire, police, press and the curious. The large crowds would be vulnerable targets.
A second version suggests the car bombs are to divert authorities and leave other targets vulnerable. They even have a Halloween aspect – but Halloween is too near. So, since the first was on 9/11 – how about 11/9. And you thought you had to go to school to study creative writing. Happy Halloween!
Buying into the weakness HAL’s enterprise value is down ~$4bn following the preliminary finding of the National Commission on the BP Deepwater Horizon. At face value, these finding suggest HAL used cement that was not stable. However, we focus on two key points: (1) HAL’s contract appears to indemnify in such an instance (the contract with BP was just released and we’re reviewing); (2) cement failures are not uncommon and HAL had personnel on site to remediate. The decisions to not run tests to prove the efficacy of the cement job were not HAL’s.
National Commission conclusions on the Macondo incident
A letter from the National Commission on the BP Deepwater Horizon released today arrived at four preliminary conclusions: (1) only 1 of 4 tests HAL ran on various slurry designs for the final cement job on the Macondo well indicated that the slurry would be stable; (2) the cement job may have been pumped without any lab results that the foam cement slurry would be stable; (3) HAL and BP both had results a month before the Macondo incident that a similar foam slurry design to the one actually pumped at the Macondo well would be unstable but both parties failed to act upon it; and (4) HAL and perhaps BP should have considered redesigning the foam slurry.
HAL believes: (1) conditions used by Chevron on test runs done on behalf of the Commission were not identical to those used on the Macondo well; (2) slurry tests performed by HAL did show stability (though the timing of those tests are unclear); (3) as the National Commission report lays out “cementing failures are not uncommon even in the best circumstances” and hence negative pressure test and cement evaluation logs are performed to identify cementing failures which BP and/or RIG misinterpreted or chose not to conduct such tests; and (4) HAL is fully indemnified as per its contract with BP (clause 19), which HAL posted on its website today.