as Vegas, Nevada-based Wynn Resorts is a multinational developer, owner, and operator of destination casino resorts, which currently owns and operates casino resorts in Las Vegas and the Special Administrative Region of Macau in China.
The company targets the high value, affluent gaming and leisure customer in both markets through the use of its iconic Wynn brand name, luxurious resorts, and strong amenity package. The company is able to reach these affluent customers more cost efficiently than other operators.
In addition, the company benefits from strong cross-market play of its high-end international gamblers, which allows Wynn to capture a larger share of its customer spend.
"All this leads to one of the highest EBITDA margins in the gaming industry, despite generating the majority of its revenues in Macau with a 39% tax rate and operating high-quality resorts, which are typically more costly to operate," RBC Capital Markets analyst John Kempf wrote in a note to clients.
Recently, a deceleration in Macau's monthly gross gaming revenues and visitation combined with signs of a weakening China economy has begun to weigh on Wynn's shares. Though this is a worthwhile concern, it has been already discounted in the stock. "Longer term, we like the Macau story, and believe penetration into China remains low. As the premium market leader in Macau, we believe Wynn is best able to withstand near-term volatility," Kempf said.
In addition, the litigation surrounding the removal of Kazuo Okada from the Board and the forced redemption of his shares remains an overhang on the shares. Okada was the largest shareholder at the time, owning a 19.7 percent stake in the company. Though the company has made a compelling case on why it believes it will be successful in litigation, this does present some uncertainty and headline risk.
However, the potential special dividend at the end of the year should act as a catalyst for the shares. Wynn has paid large, special dividends in four of the past five years.
In November 2011, the company announced a us$ 5 per share special dividend. This compares with the us$ 8 per share made in the prior year and is separate from the 50 cents per share dividend paid quarterly. The current indicative dividend yield is 2 percent, but when special dividend is added, yield rises to almost 7 percent.
The dividend has been primarily funded by distributions made by Wynn Macau, in which 72.3 percent will flow to the Wynn corporate entity. In 2011, Wynn Macau generated over us$ 1.1 billion in free cash flow and distributed us$ 800 million to equity holders. "Given our projections for slightly higher EBITDA in 2012, we estimate free cash could approach us$ 1.2 billion at this entity," the analyst said.
The cost of Wynn Cotai, which could be as high as us$ 4 billion, may limit the amount of special dividend but not negate it. The company was reportedly in the market for a us$ 1.5 billion credit facility but was considering increasing the amount to us$ 2.5 billion given the demand by lenders.
Typically, equity is contributed first in most finance developed projects. However, since the Wynn Cotai project will be spread out over 3.5 years, the equity contribution is not likely to be meaningful in 2012, or less than us$ 200 million.
"This would imply us$ 267-us$ 467 million of equity contributions over the next three years, leaving us$ 600-us$ 770 million of dividend capacity for Wynn Macau, assuming no EBITDA growth. Under this analysis, we estimate Wynn could have special dividend capacity of us$ 4-us$ 5.50 per share over the next three years, in addition to its current quarterly recurring dividend," Kempf noted. Thus, the casino operator still has the capacity to make substantial, special dividends, with the range dependent on the company's success in its debt financing efforts.
Shares of Wynn Resorts have fallen about 30 percent in the past one year and 9 percent year-to-date. They were trading at an 18-month low and well below the us$ 160 price where it traded in mid-2011.
"Nevertheless, while there may be some choppiness in the stock price in the near term, we believe it represents a buying opportunity. Over time, we expect the stock to return to premium levels as these concerns abate," Kempf added.