A Work Project, presented as part of the requirements for the Award of a Master Degree in Finance from the NOVA – School of Business and Economics. BETWEEN A CALL AND A FOLD FRANCISCO MENDONÇA MIGUEL REALISTA 26009 25872 A Project carried out on the Master in Finance Program, under the supervision of: Francisco Antunes da Cunha Martins 3rd January, 2020 Abstract The paper includes an in-depth analysis of MGM Resorts International stock and provides information reasonably sufficient upon which to base an investment decision. The analysts intend to add value to a potential MGM Resorts International investor by including a price target as a result of the company’s detailed valuation, full and comprehensive analysis of the company, its sector and competitors and a clear analysis of the main parameters driving the company’s value and risks. Keywords Gambling, Lodging, Tourism and Resorts This work used infrastructure and resources funded by Fundação para a Ciência e a Tecnologia (UID/ECO/00124/2013, UID/ECO/00124/2019 and Social Sciences DataLab, Project 22209), POR Lisboa (LISBOA-01-0145-FEDER-007722 and Social Sciences DataLab, Project 22209) and POR Norte (Social Sciences DataLab, Project 22209). MASTER IN FINANCE MGM RESORTS INTERNATIONAL COMPANY REPORT TOURISM & GAMBLING 3 JANUARY 2020 FRANCISCO MENDONÇA AND MIGUEL REALISTA Between a Call and a Fold Recommendation: HOLD Vs Previous Recommendation - A cautious stand on MGM Resorts International Price Target FY20: $34.77 Neutral Rating: Our coverage of MGM Resorts International Vs Previous Price Target - converges to a Hold rating, as we estimate a price target of $34.77 Price (as of 3-Jan20) $33.27 (implicit 4.4% upside). The valuation implies an EV/EBITDA Reuters: MGM.N, Bloomberg: MGM:US multiple of 11.4x, ranking MGM below industry averages. Despite 52-week range ($) 33.30-23.87 recognizing the growth potential of MGM, the current level of Market Cap ($m) 16,374.48 uncertainty leads us to recommend investors to wait and see how Outstanding Shares (m) 519 Dividend yield 1.64% the company and industry perform in the next few months. Source: Bloomberg MGM vs S&P500 • As economic growth appears to slow down, the gambling sector demonstrated a poor performance in Las Vegas and Macau, hurting MGM’s L4L growth in 2019, compensated by the successful ramp-up of new resorts and casinos. • We recognize the potential of entering the Japanese gambling market and the promising JV with GVC on the online gambling Source: Bloomberg, ER Analysis front, but both opportunities seem to be in too early of a (Values in $ millions) 2018 2019E 2020F development stage to accurately incorporate in the valuation. Revenue 11,763 12,467 13,261 Adjusted EBITDA 2,660 3,058 3,456 Adj. EBIDTA margin % 22.6% 24.5% 26.1 • Despite confidence of the management in fully executing Net Income Attributable 377 349 794 MGM2020, we are reticent of a full target meeting. ROIC 5.6% 5.7% 6.7% Core FCF (230) 846 1,230 P/E 47.6 51.5 22.6 • We estimate revenue to grow at 3.5% CAGR 2019-2027 - EPS ($/share) 0.73 0.68 1.54 boosted by the growth of the Macanese segment MGM Cotai Source: Company Filings, ER Analysis ramps-up – converging to a 28.1% EBITDA margin. After the Company description recent strong investment, we expect Capex to shrink and tending MGM Resorts International owns and operates a portfolio of casino resorts, to stabilize at c.8% revenue, improving CF generation. LT ROIC is offering gambling amenities, hotel services, expected to reach 10.9% in run-rate. food and beverage, entertainment and other related services. The company is present internationally - in the United States of America and Macau. THIS REPORT WAS PREPARED EXCLUSIVELY FOR ACADEMIC PURPOSES BY FRANCISCO MENDONÇA AND MIGUEL REALISTA, MASTER IN FINANCE STUDENTS OF THE NOVA SCHOOL OF BUSINESS AND ECONOMICS. THE REPORT WAS SUPERVISED BY A NOVA SBE FACULTY MEMBER, ACTING IN A MERE ACADEMIC CAPACITY, WHO REVIEWED THE VALUATION METHODOLOGY AND THE FINANCIAL MODEL. (PLEASE REFER TO THE DISCLOSURES AND DISCLAIMERS AT END OF THE DOCUMENT) Page 1/32 MGM RESORTS INTERNATIONAL COMPANY REPORT Table of Contents COMPANY OVERVIEW ....................................................................................................................... 3 COMPANY DESCRIPTION ........................................................................................................ 3 SHAREHOLDER STRUCTURE ................................................................................................... 5 CORPORATE GOVERNANCE ................................................................................................... 6 TECHNICAL PERFORMANCE ................................................................................................... 6 MGM’S POSITIONING – FINANCIAL ANALYSIS ............................................................................... 6 TOP LINE ANALYSIS .............................................................................................................. 6 Bad Fortune of 2015 ................................................................................... 6 Recovery after the fall ................................................................................. 7 Acceleration in 2019, as recent projects ramp-up ....................................... 8 PROFITABILITY ...................................................................................................................... 9 ROIC AND INVESTMENT ...................................................................................................... 10 CAPITAL STRUCTURE .......................................................................................................... 10 BUSINESS MODEL ........................................................................................................................... 10 GAMBLING DRIVERS ............................................................................................................ 11 Domestic drivers ....................................................................................... 11 Macau drivers ........................................................................................... 12 ROOM DRIVERS .................................................................................................................. 13 F&B AND ER&O DRIVERS ................................................................................................... 14 TRENDS (OPPORTUNITIES AND RISKS) ........................................................................................ 14 MACROECONOMIC AND SECTOR OUTLOOK ........................................................................... 14 United States ............................................................................................ 14 Macau ...................................................................................................... 16 DIGITIZATION AND DISRUPTION ............................................................................................. 17 Airbnb ....................................................................................................... 17 Online Gambling and Sports Betting ......................................................... 17 NEW ENTRANTS.................................................................................................................. 18 Las Vegas ................................................................................................ 18 Regional ................................................................................................... 19 Macau ...................................................................................................... 19 OTHER ............................................................................................................................... 19 Japan ....................................................................................................... 19 LIGHTER STRATEGY ....................................................................................................................... 20 LIGHTER STRUCTURE - MGM2020 ....................................................................................... 20 ASSET-LIGHT ...................................................................................................................... 20 Eyes on Osaka: Genting rivalry ................................................................ 21 Eyes on Sports Betting and Interactive ..................................................... 22 Investor Returns ....................................................................................... 23 THE DEBATE .................................................................................................................................... 23 BULL’S ARGUMENTS ............................................................................................................ 23 BEARS’ ARGUMENTS ........................................................................................................... 24 METHODOLOGY AND VALUATION ................................................................................................. 25 FORECASTS ....................................................................................................................... 25 CONSIDERATIONS ............................................................................................................... 26 CONCLUSIONS ...................................................................................................................