By John Jackson 
Melco Resorts & Entertainment (NASDAQ: MLCO) should consider selling its casino hotels in Cyprus and Manila so it can fund a full acquisition of Studio City International (NYSE: MSC) and focus on its Thailand ambitions, according to an analyst.
Analyst’s View on Melco’s Performance and Asset Sales
In a new report to clients, Vitaly Umansky of Seaport Research Partners noted that while shares of Melco are undervalued, investor sentiment around the stock is dour and that’s unlikely to change over the near term barring dramatic action such as asset sales. “Outside Macau, the Philippines (City of Dreams Manila) continues to generate cash but lacks real growth dynamics due to increasing Manila competition, while Cyprus has been a disappointment partly due to the conflicts in Russia and Israel,” observed Umansky.
Melco’s Capital Allocation and Studio City Acquisition
Melco already owns 55% of Studio City, which is the holding company for a Macau integrated resort of the same name. “Studio City features 2,493 luxury hotel rooms, diverse food and beverage establishments and approximately 38,500 square meters of complementary retail space,” according to the company’s investor relations website. Based on Melco’s market capitalization of $2.35 billion and Studio City’s market value of $893.61 million (as of January 2024), the former should be able to purchase the 45% of the latter it doesn’t own without too much financial strain. Umansky noted that should Melco acquire Studio City outright, it would set the stage for a merger with Melco International Development.
Selling Assets to Focus on Thailand and Other Markets
“We remain of the view that Melco would be better off at this stage, with low valuation and high debt, to try to sell its Philippines and Cyprus assets and reallocate the capital,” Umansky said in the new report. Should Melco opt to sell its casino resorts in Cyprus and/or Manila, it could help the operator better focus its efforts on Thailand. The gaming company recently declared an intent to bid on a gaming license in that country when politicians formally approve casino gaming, which is widely expected to happen.
Financial Challenges and Potential Partnerships in Thailand
Umansky said going it alone in Thailand could be a financial hurdle to Melco, but the operator could work through those challenges by working with a partner — a playbook it’s used in other countries. The operator’s “advantage may lie in its ability to do a lower capital investment deal with local partners (like it has in Sri Lanka), potentially in a secondary market in Thailand,” concludes Umansky.