SCL Summary: Dividend Sustainability and Financial Outlook
Core Content
Sands China Limited (SCL) is one of the six major gaming operators in Macau, operating properties such as Sands Macau, The Venetian Macau, Plaza Macau, and Sands Cotai Central. The company is currently facing significant challenges in maintaining its absolute dividend payout, which has led to a reevaluation of its financial sustainability.
Main Points
- Dividend Expectations: SCL declared a USD2.1bn dividend in 2014, paid in 2015 (HKD1.99/share). Management has expressed a strong commitment to maintaining or increasing this payout.
- Stress Test Findings: Analysis indicates SCL may not be able to maintain the USD2bn dividend in 2016, as its operating cash flow is expected to decline due to working capital needs for the new Parisian property and macroeconomic challenges in Macau, including increased UnionPay scrutiny and AML compliance requirements.
- Credit Facilities: SCL would need to draw down its remaining USD2bn credit facility to fund the 2015 dividend, which would exhaust all available credit and leave it with insufficient cash to pay the 2016 dividend.
- Capex and Loan Repayment: The end of the capex cycle in 2015-16 signals the start of a loan repayment cycle, which is expected to significantly increase cash outflows.
- Market Valuation: SCL is currently trading at a 15x 2016E EV/EBITDA multiple, a 23% premium to peers. The market's high expectations for dividends may be overestimated.
Key Financial Insights
Dividend Forecast
| Year |
Daiwa (USDm) |
Consensus (USDm) |
Difference (%) |
| 2014 |
2,071 |
2,071 |
n.a. |
| 2015E |
2,071 |
2,071 |
- |
| 2016E |
791 |
2,071 |
-62% |
| 2017E |
721 |
2,071 |
-65% |
Financial Summary (USDm)
| Metric |
2015E |
2016E |
2017E |
| Revenue |
6,538 |
6,676 |
7,353 |
| Operating Profit |
1,440 |
1,411 |
1,451 |
| Net Profit |
1,054 |
985 |
1,145 |
| Core EPS (FD) |
0.131 |
0.122 |
0.142 |
| DPS |
0.257 |
0.098 |
0.114 |
| EV/EBITDA |
17.4 |
17.5 |
16.0 |
| ROE (%) |
17.7 |
19.7 |
24.1 |
Cash Flow (USDm)
| Year to 31 Dec |
2015E |
2016E |
| Operating Cash Flow |
1,780 |
1,543 |
| Free Cash Flow |
155 |
333 |
Balance Sheet (USDm)
| Item |
2015E |
2016E |
| Cash & Short-term Investment |
2,727 |
864 |
| Total Liabilities |
7,290 |
7,278 |
| Shareholders' Equity |
5,507 |
4,516 |
| Net Debt to Equity |
48.3 |
100.2 |
Dividend Yield and Valuation
- 2016E Dividend Yield: Implied at 7% if SCL maintains its USD2bn dividend, which is higher than the current yield of 2.5%.
- EV/EBITDA Multiple: 15x for 2016E, a 23% premium to peers.
- Share Price: As of 10 October 2015, SCL's share price was HKD28.1, implying a 7% yield on the 2014 total dividend (HKD1.99/share).
Market and Operating Conditions
- Macau's Macro Environment: Increasing scrutiny from UnionPay and AML compliance in both the US and China could further impact SCL's performance.
- Operating Cash Flow: SCL's operating cash flow declined by 46% YoY in 1H15, and is expected to continue to decline in 2H15-16 due to the Parisian property opening and market contraction.
- EBITDA vs. Operating Cash Flow: There is a strong correlation between EBITDA and operating cash flow, but SCL's operating cash flow has deteriorated more sharply than EBITDA in recent periods.
Recommendations
- Rating Change: The rating is lowered from Outperform (2) to Hold (3) due to the overvaluation and high dividend expectations.
- Target Price: The 12-month target price is retained at HKD28.17.
- Cautious Outlook: The market fundamentals in Macau remain weak, and the assumption of dividend growth is not supported by the current financial outlook.
What We Differ
- Dividend Growth Expectation: While the market expects a GGR recovery in 2H15-16, we foresee continued weakness and do not believe the supply-side-driven growth narrative is valid.
Summary of Risks
- Dividend Sustainability: SCL is at risk of being unable to maintain its USD2bn dividend payout, especially in 2016.
- Credit Facilities: Drawing down the USD2bn credit facility would exhaust all available credit.
- Operating Cash Flow: The cash flow is expected to remain weak, and growth is not realistic given the current market conditions.
- Loan Repayment: The loan repayment cycle is expected to begin in 2Q17, with scheduled repayments surpassing peak capex in 2014-16E.
