New dividend policy should further narrow the holding discount versus MPEL, in our view
Limited downside from our bear-case valuation study suggests a good entry point
Reiterate OW with an unchanged target price of HKD37.9
New dividend policy: After Melco Crown Entertainment (MPEL US, USD36.11, OW, USD52) announced a special dividend of USD0.344/ADR and adopted a regular dividend policy of 30% payout ratio, Melco International followed suit. The company has proposed
its first ever dividend of HKD20.8 cents per share for FY13 last Friday. This is according to the newly approved regular semi-annual dividend policy at a ~20% payout ratio which transforms Melco International from a passive shareholder to a cash collector of its investment who also shares its gains out. We believe the dividend payment will help to further narrow the holding discount versus MPEL.
FY13 results is a non-event: Melco reported a net profit of HKD1,596m whereby the bulk of that amount stemmed from contributions from Melco Crown. Over 95% of Melco’s valuation is driven by its 33.6%-owned MPEL; we believe MPEL’s performance would be the key to future growth of Melco. Our study in Limited downside to our bear case , 5 Feb, shows that Melco has reached its bear-case valuation and the current level presents a good entry point.
Reiterate OW; prefer the holding company on valuation: We like Melco because of its: 1) high and growing mass exposure, which can translate into improving earnings quality; 2) strong opening pipeline, and 3) narrowing of valuation gap between PE and EV/EBITDA valuation as operating leverage kicks in and should collectively re-rate MPEL. Also, we prefer Melco International on valuation. We reiterate our Overweight rating on the stock with an unchanged target price of HKD37.9. Melco International is our preferred name in the sector together with Sands China (1928 HK, HKD57.40, OW, TP HKD70.80) as we continue to favour mass-focused names.