How Are Macau Headwinds Likely To Affect Wynn’s Stock In 2020?

After reporting a 10% decline in casino revenues from Macau in 2019, Wynn Resorts (NASDAQ: WYNN) is likely to face another year of top-line erosion as the coronavirus outbreak has prompted the Chinese government to halt Macau visas temporarily. Chinese tourists account for nearly 70% of Macau’s visitors, and Trefis expects the ongoing outbreak to have a material impact on results for the first quarter. We highlight the trends in Wynn Resorts’ expenses over the years, along with our forecast for 2020 in an interactive dashboard and detail the key expense categories that would weigh on the company’s stock. However, we expect the company’s results to recover over the second quarter as things return to normal in Macau, and revenues from the company’s recently opened Encore Boston Harbor property continue to their growth trajectory. We maintain an estimate of $130 per share for Wynn Resorts’ valuation, which is around the current market price.

A Quick Look at Wynn Resorts’ Revenues

Wynn Resorts reported $6.6 billion in Total Revenues for full-year 2019. This includes four divisions:

• Casino: $4.5 billion in FY2019 (69% of Total Revenues). This segment includes income from regulated gambling activities at Wynn properties. Macau, Las Vegas, and Boston properties contribute 86%, 9%, and 5% of the casino revenues, respectively.
• Rooms: $804 million in FY2019 (12% of Total Revenues). This segment includes income from visitors/tourists who lodge in Wynn properties. Macau, Las Vegas, and Boston properties contribute 35%, 60%, and 5% of the room revenues, respectively.
• Food and Beverage: $819 million in FY2019 (12% of Total Revenues). This segment includes income from restaurants at Wynn properties. Macau, Las Vegas, and Boston properties contribute 24%, 68%, and 8% of the Food and Beverage revenues, respectively.
• Entertainment and Retail: $414 million in FY2019 (7% of Total Revenues). This segment includes income from retail stores at Wynn properties, per separate agreements. Macau, Las Vegas, and Boston properties contribute 47%, 48%, and 5% of the Entertainment and Retail revenues, respectively.

Wynn’s EBITDA margin likely to trend lower in 2020

• In 2019, Wynn Resorts incurred $6.5 billion in total expenses, including $5.7 billion of operating expenses, $188 million of non-controlling interests, and $177 million of income tax.
• As the company generates nearly 70% of its total revenues from casino business, therefore, direct expenses associated with casino operations were $2.9 billion (almost 50% of the company’s bottom line).
• General and administrative expenses are the second biggest expense category for Wynn Resorts (nearly 12% of Total Revenues) and include payroll, marketing, property taxes, and other maintenance costs.
• The company recognizes G&A expenses and direct expenses associated with Casino, Rooms, F&B, and Convention businesses for the calculation of EBITDA margin.
• The company’s overall EBITDA margin has remained within a 27-30% range in the last few years.

General and administrative expenses to remain high in 2020

• Casino and G&A expenses account for 45% and 13% of Wynn Resorts’ total expenses, respectively.
• As casino expenses majorly include gaming taxes that are driven by gross gaming revenues, we expect these to decline with the shrinking top line.
• The share of general and administrative expenses increased from 11.3% in 2018 to 13.6% in 2019 of total revenues, primarily from the opening of Encore Boston Harbor.
• Thus, Wynn Resorts EBITDA margin declined by three percentage points to 27%, and adjusted net income margin also trended downwards.
• We expect the share of general and administrative expenses to remain high as these costs are recurring in nature.
• Thus, we expect higher G&A expenditure to weigh on Wynn’s earnings and continue to be a drag on its adjusted net income margin in 2020 (Note: Adjusted net income margin excludes pre-opening and impairment costs).

Macau heads into another year of GGR declines, but Boston property should cushion the blow

• Considering a 25% decline in table games drop and occupancy rate at Wynn’s Macau properties, Wynn Resorts’ revenues would shrink by 7.5% to $6.1 billion for the full year 2020.
• Moreover, the company would incur nearly $850 million in recurring general and administrative expenses, whose share of total revenues would remain reasonably stable.
• However, the company’s Boston property is likely to offset the declines resulting in a slight improvement in adjusted net income margin.
• Trefis maintains its price estimate for Wynn Resorts’ at $130 per share, using a forward P/E multiple of 43x and a forecast of $3.02 for earnings per share in 2020, as detailed in our interactive dashboard for Wynn Resorts’ valuation.

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