4Q12 for Las Vegas Sands (LVS): Asian good times are back

the report

After the New York close yesterday, LVS reported its 4Q12 earnings results.  The company reported profits of $434.8 million, or $.54 a share, on revenues of $3.06 billion.  EBITDA (earnings before interest, taxes, depreciation and amortization–a measure of operating profits) was $1.002 billion.

Revenues were up 20% year on year, net income up 35%.

As regular readers know, casino company financials are unusual in that what counts as revenue for gambling companies is not the amount bet by customers but rather the portion of that amount that the casino retains or “holds”–that is to say, the amount that customers lose.  The amount bet, which appears nowhere on the income statement (but is normally somewhere in the company press release), is, in my experience, a relatively stable and pretictable function of customers’ income and casino floor space.  The “hold,” on the other hand, is also a function of luck, which can vary considerably over short periods of time.  The first thing an analyst will do in looking at casino earnings is to correct them for these luck variations.

As for LVS, the company was unusually lucky in Macau during 4Q12, but unlucky everywhere else.  Overall, EPS would have been $.63 if the company had had average luck throughout its operations.  That compares with the Wall Street consensus, which I’ve always read as being luck neutral, of $.59.

LVS has also raised its quarterly per share dividend from $.25 to $.35, starting with the March 2013 payout.

As I’m writing this, the stock is up by about 5% in after hours trading.

the details

Macau

Sands China generated EBITDA of $622.2 million during the quarter, up 44% year on year.  Subtracting out unusually good luck, EBITDA was $575.4 million, up 32.5% vs. 4Q11.

LVS’s aggressive expansion in developing the Cotai area appears to be paying off.  Because it has developed extra capacity, it stands to benefit disproportionately as both economic recovery on the mainland and better transportation links deliver increasing numbers of visitors to Macau.

Perhaps more important, LVS announced it has been granted permission by the Macau government to add 200 new tables to its casinos, a strong sign that the SAR approves of the way Sands China is doing business.

Singapore

After having hold-adjusted EBITDA stall, with a slight downward bias, for the last year at around $380 million, Marina Bay posted 4Q12 EBITDA of $406.4 million, up 6.8% yoy and 9.1% qoq.  Although this market is so new it’s impossible to interpret the figures with any confidence, the fact that EBITDA is moving up again is encouraging.

the US

Flattish EBITDA, which is all investors should want.  Hold-adjusted, Las Vegas was down by $8.1 million at $87.9 million.  Bethlehem was up $3.0 million at $25.6 million.

asset value

LVS has a market cap, at the aftermarket quote, of about $45 billion.  It’s ownership of Hong Kong-traded Sands China is worth $29 billion.  If we applied the same valuation to 100%-owned Marina Bay Sands, it would be worth about the same.  But Singapore doesn’t appear to have the explosive growth potential of Macau, at least as things stand now.  Remember, though, this time a year ago there seemed to be no limit to the upward trajectory of Marina Bay’s EBITDA, so we’ve got to keep an open mind.  Trying to be conservative, let’s say that current Singapore earnings are worth a multiple of .6x what Macau’s are.  That would give Marina Bay Sands an asset value of about $17 billion.

Together, the Asian properties explain the entire market value of LVS.

Over the next year, what might we reasonably expect from Asia?  Sands China could be trading at a price 20% higher than it is now, based on Macau market growth and increased Sands China market share.  Revival of the apparently more business cycle-sensitive Singapore gambling market might produce 10%-15% EBITDA growth and a mild expansion of the relative multiple.  If so, even if the market continues to value the US operations of LVS at the current zero, we should expect a substantially higher share price for LVS.

earnings

Full-year earnings for LVS in 2012 were $2.14/share.  To me, it seems reasonable to expect $2.50 in 2013–meaning LVS is currently trading on a forward earnings multiple of 22x.  Yes, that’s high, but it’s no longer in the stratosphere.  The stock also yields 2.6%.

Therefore, even on a conventional PE basis, which I don’t think is the right way to value the stock, LVS doesn’t look bad.