We are maintaining our Neutral recommendation on Las Vegas Sands Corp. (LVS'>LVS) as the shares appear to be fairly valued. Headquartered in Las Vegas, Nevada, the company is a leading international developer of multi-use integrated resorts.
Las Vegas’ third quarter 2011 adjusted earnings of 55 cents surpassed the Zacks Consensus Estimate of 53 cents on higher-than-expected top-line growth and margin expansion. Quarterly revenues climbed 26.2% year over year to $2.41 billion, outperforming the Zacks Consensus Estimate of $2.35 billion. Consolidated adjusted property EBITDA (earnings before interest, taxes, depreciation and amortization) shot up 43.2% year over year to $924.1 million.
Macau, the only Chinese city where gambling is legal, is becoming the hot spot for gamblers around the world. Thus, gaming volume in Macau continues to remain robust owing to strong tourism. Moreover, improving infrastructure in Macau will further boost visitation. Management does not see any signs of cannibalization between the properties and believes Macau is still capacity constrained.
The company is also making efforts to improve its relationship with junket operators in order to enhance its market share. In order to appeal to junkets and high-end customers, the company plans to spend $125 million in capex to upgrade its existing VIP facilities, with refurbishments expected to be completed by Chinese New Year 2012.
Presently, Las Vegas has the Sands Cotai Central resort project in the pipeline, which has great growth potential and will represent the next phase in the company’s Macau strategy. The resort will come up in two phases: the first phase of the project is expected to open by the end of the first quarter of 2012, first part of the second phase is expected to open in the third quarter of 2012 while the second part of phase two will open in early 2013.
We believe that the development of Sands Cotai will drive visitations in Macau and with Sands Cotai being the last new development on the Cotai Strip for the next three to four years; it will provide an edge to the company over its peers.
Las Vegas Sands also continues to benefit from its positioning in Singapore, the fastest growing gaming market in the world. We believe that the opening of a property, Marina Bay Sands, in Singapore appears to be the best future growth opportunity for the company. We expect visitation to be up significantly in the coming quarters, with the property fully developed including high quality non-gaming amenities and convention business beginning to ramp.
Moreover, Singapore is poised to grow as the areas surrounding Singapore have good long-term growth prospects. Additionally, with incremental strength in the Asian markets, we expect the property to continue generating outstanding returns for the company. Net revenue in the third quarter was $792.4 million, up 63.1% and adjusted property EBITDA margin was 52.2%, reflecting strong gaming volume growth in each segment.
Additionally, the company’s Las Vegas business is experiencing a turnaround in demand with a gradual recovery in the global economy. To improve the performance of the property, the company is significantly cutting back on compensation as well as other promotions and is focusing on cash revenues to drive visitation.
However, the upside might be impacted by the excess capacity in the market. Additionally, we remain cautious on the stock due to stiff competition from Wynn Resorts Limited (NasdaqGS:WYNN - News) and MGM Resorts International (NYSE:MGM - News) and heavy reliance on debt financing and capital market for development.
Furthermore, the growth and profitability of the company might also be adversely impacted by reductions in discretionary consumer spending due to challenging economic conditions, resulting from high unemployment rate and a tight credit market.
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