NagaCorp EBITDA to grow 20% annually, better placed than Macau: analysts

Financial services firm Morgan Stanley is tipping EBITDA growth of 20% per annum through 2020 for NagaCorp, stating that the Cambodian casino operator “scores better than Macau” when evaluating its short-term prospects.

In a Tuesday note, Morgan Stanley analysts said the launch of Naga 2 at its NagaWorld property in Phnom Penh late last year and expected benefits from China’s Belt and Road initiative would drive EBITDA growth of 23% in 2018 and 19% in 2019, taking into account a proposed 5% tax on gaming revenue expected to be introduced by the Cambodian government this year. Without the tax, EBITDA growth forecasts would be 47% for 2018 and 18% for 2019.

“Supply drives demand,” said Morgan Stanley’s Praveen Choudhary and Jeremy An. “We believe the opening of Naga 2 in November 2017 will increase total capacity 2x to 3x (rooms +113%, tables +100% and slots +201%).

“With better hotel hardware/services, the company should be able to attract more premium mass/VIP customers, which should enable an EBITDA growth of >20% CAGR through 2020e.

“Two new key junkets (Suncity and Meg-Star) will be added in 1H18. In Macau, Galaxy’s and Wynn Macau’s market cap more than doubled in the 18 months after the opening of their second casino.”

Choudhary and An add that Naga will benefit from Cambodia’s position in regards to the Belt and Road Initiative, noting that investment from China accounted for 52% of total foreign investment in Cambodia and grew 45% year-on-year in 2017. Favorable policies including the recent signing of 13 agreements between China and Cambodia covering areas such as infrastructure, finance, tourism and trade will drive visitation from China to grow 13% per annum through 2020, they said.

Most notably, Morgan Stanley believes NagaCorp is better positioned that Macau operators to enjoy sustained growth in the short-term, citing its monopoly license, favorable tax and low operating costs.

“NagaCorp operates as the only licensed casino in Phnom Penh, with a long-term license (70 years) and with a 40-year monopoly within a 200km radius of Phnom Penh that expires in 2035, with no limits on the amount of gaming space, tables or type of games,” it said. “Macau’s licenses come up for renewal in 2020/2022.

“NagaCorp enjoys more favorable tax rate, enabling it to pay higher commissions to attract junkets compared with tax rates in Macau (39%) and Singapore (16% to 17%). The removal of overhang with respect to tax rate in Cambodia in 2018 serves as another growth catalyst.”