MGM Reports Loss in Q2, Helped by Improved Room Revenues

MGM Resorts International (NYSE:MGM) has recently announced its Q2 results with approximately a 29% increase in its net revenues. The significant increase in its net revenues is primarily due to the consolidation of its MGM China results since June 3, 2011. MGM has reported a net loss of about $145 million this quarter, compared to net income of $3.4 billion in the same period last year. The comparability of current and prior year quarter is affected due to $3.5 billion MGM China consolidation gain in last quarter and certain impairment charges and tax provisions recognized this quarter. Following the earnings release, MGM’s share price has witnessed a marginal decline.

We have revised our price estimate for MGM from $11.10 to $10.09, implying a premium to the current market price, and we have updated MGM’s’ net debt position, according to the latest balance sheet numbers. We have also adjusted our estimates for capex and casino revenues in accordance with company guidance and MGM’s year-to-date performance.

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Performance of wholly-owned operations

MGM, which operates 15 wholly-owned properties in Nevada, Mississippi and Michigan, reported a 1% decline in its casino revenues compared to the prior year quarter. This was affected by a lower table games hold percentage of 17.7% this quarter as was compared to 18.2% for Q2 2011. The slot revenues remained flat this quarter as compared to the prior year quarter.

However, its hotels segment fared relatively better as compared to its casino operations with its rooms revenue witnessing an increase of 3% primarily driven by a 5% increase in revenue per available room and 4% increase in average daily rates. According to our estimates, the hotel division contributes approximately 29% to MGM’s present valuation. We expect average daily rates to increase moderately in the coming years due to the economic recovery in the U.S.

Macau expansion plans

MGM is bullish on Macau and is presently seeking government approval for its next investment in Macau. It has plans to develop a $2.5 billion integrated resort in Macau featuring approximately 500 tables, 2,500 slots, and 1,600 rooms. This investment, if it materializes, will provide MGM a stronger foothold in the Macau gaming industry and will help it to geographically diversify its revenue stream.

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