Our Revised Price Estimate Of $159 For Wynn Resorts

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Wynn Resorts

We have revised our price target for Wynn Resorts (NASDAQ:WYNN) stock from $186 to $159, which reflects a change of around 15%. The current valuation reflects our revised estimates of Wynn’s casino operations in Macau. We believe that the company’s VIP gaming turnover in Macau will continue to see some pressure in the coming months amid the ongoing anti-corruption crackdown in the region. However, we believe the growth in this segment will resume next year and partly will be driven by its new casino resort in Cotai, which will further enhance its market share in the region. We continue to remain bullish on Macau gaming in the long run and expect the VIP gaming turnover to be around $135 billion by the end of our forecast period.We have also restructured Wynn’s model to give a better picture of VIP gaming revenues in Macau. We now report VIP gaming revenues, net of commissions.

Also, the company in January had released a revised plan for its new casino resort in Everett, Massachusetts. The new casino will feature around 600 rooms and around 3,000 slots. The affect of this new casino is now reflected in our price estimate.

See our complete analysis of Wynn Resorts’ stock here

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Expect VIP Gaming To Decline In 2015

We believe that the situation in Macau will remain fraught in the near term and it will continue to have an unfavorable impact on VIP gaming in the coming months. 2014, as we know, was tough for all the casino operators in Macau and it marked as the first full year of gross gaming revenue decline. The primary reason for this drop is the government’s anti corruption crackdown. A wave of high-profile arrests of senior Chinese officials has hurt the VIP business of Macau casinos. Visa transit restrictions, a smoking ban and the weakening economy added to the woes for casino operators in the region. Moreover, Beijing wants Macau to diversify its economy, largely dependent on gambling, which accounted for 80% of the local government revenues in 2013. Wynn was far more exposed to the recent decline in Macau due to its higher reliance on VIP gaming, which accounts for close to 25% of Wynn’s stock value, according to our estimates.

Accordingly, VIP gaming turnover declined 12% in 2014 and we expect it to further drop by 15% to $92 billion in 2015.  However, we expect it to pickup from 2016, when the company’s new Cotai resort will be operational. While the gaming situation in Macau may be fragile in the near term, we expect casinos to do well in the long run, given that Macau is the only place in China where gambling is legal. Also, gambling in China is an accepted practice in the home as well as in social circles. China is seeing growth in the number of HNIs (high net worth individuals), but only a small portion of them visit  Macau for gambling. China currently has about 1.3 million HNIs with a combined wealth of $4.3 trillion. As China continues to grow, more people will likely visit Macau for gaming activities and Wynn as well as other casino operators should thus continue to benefit from the rising demand, as they did in the past.

Change In VIP Gaming Revenue Reporting Style

Looking at the reporting style, we now show VIP gaming revenues, net of commissions. Junket commission refers to an arrangement whereby a client is introduced to a casino operator by a junket promoter, who in return receives a commission or payment in other form from the casino operator. Junket commission is paid out either at a fixed rate or win rate model. The fixed rate is 1.25 percent of VIP rolling chip turnover and the casinos remain responsible for gaming taxes while the win rate model is when VIP junket operators split the gross gaming win with the casino and also share the downside risk. It must be noted that there is a small portion of VIP gaming, which does not come through junket promoters. The effective commission rate for Wynn has historically been around 0.9% of the turnover and we expect it to remain in that range during the forecast period.

Impact of Wynn Everett Casino Project

Last year, Wynn had won the bid to build a $1.6 billion casino resort just outside Boston. In January this year, the company released a revised plan for the integrated resort with 600 hotel rooms, 3,000 square feet of meeting and convention space, 94,000 square feet for shopping and retail, eight restaurants, 150 table games and 3,000 slot machines. This compares with around 1,900 slot machines and around 4,850 hotel rooms of Wynn Resorts at the Las Vegas Strip. The new resort is expected to be operational by 2017. Accordingly, we have revised our slot machine count from 1,858 currently to 4,858 by 2017. This has led to a jump in slot revenues from a little over $200 million estimated earlier to $550 million by 2017. Also, the number of hotel rooms have now been revised from 4,748 currently to 5,348 by 2017, which has resulted in $61 million additional hotel revenues in 2017.

It must also be noted that Massachusetts is an important location as it is the third richest state in the U.S. with a per capita income that is $7,695 higher than the average U.S. per capita income. [1] Since spending on gaming and entertainment depends on the disposable income of individuals, the resort will attract gamers and tourists from all parts of Massachusetts. Boston is the largest city in Massachusetts and it is well connected with other major cities in the state and region.  Wynn will generate more than $800 million in revenue and close to $250 million in annual EBITDA from this resort, according to our estimates. This compares with $1.83 billion in revenues and $515 million EBITDA generated from Wynn’s Las Vegas operations in 2014. A $250 million EBITDA will represent a little around 10% of the company-wide EBITDA in 2018.

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Notes:
  1. Massachusetts Household Income, Department of Numbers []