On Wednesday, Morgan Stanley adjusted its stance on Galaxy Entertainment Group (OTC:GXYEF) Ltd (HKG:0027) (OTC: GXYEF) stock, downgrading from Overweight to Equalweight. The firm also revised the price target downwards to HK$38.00 from the previous HK$46.00.
The downgrade is attributed to several factors, including anticipated negative earnings revisions for the years 2024 and 2025, a reduced valuation premium compared to its peers, and an expected negative catalyst in the first quarter of 2024.
The firm's analysis indicates that the consensus expectations for Galaxy's earnings before interest, taxes, depreciation, and amortization (EBITDA) are overly optimistic. Morgan Stanley's forecasts are now 13% below the consensus for both 2024 and 2025.
The consensus had predicted market share gains following the opening of Galaxy's Phase 3 in the second half of 2023, which did not occur. Furthermore, the firm projects a decline in Galaxy's mass market share to 17.2% for the first quarter of 2024.
Another point of concern is Galaxy's valuation premium over its competitors. Historically, Galaxy traded at a discount compared to Sands and other Macau gaming companies. However, it currently trades at a premium, which Morgan Stanley believes will narrow as other companies resume dividend payments and Galaxy's recent investments fail to yield expected market share gains.
The first quarter of 2024 is seen as a potential negative catalyst for Galaxy, with the firm expecting the company's corporate EBITDA to grow by only 2% quarter over quarter to HK$2.9 billion.
This figure represents 72% of the first quarter of 2019's performance, which is weaker than the industry's projected 5% growth, or 81% of the first quarter of 2019. The anticipated underperformance is driven by a loss in mass market share and operating deleverage.
Despite the downgrade, Morgan Stanley does not recommend an Underweight position on Galaxy's stock at this time. The firm acknowledges Galaxy's strong operational track record and suggests that a more visible trend of market share gains in the second half of 2024 could lead to a more positive outlook. Additionally, some investors may still favor Galaxy due to its net cash position amidst uncertainties in the China macroeconomic environment.
InvestingPro Insights
Amidst the concerns raised by Morgan Stanley, it's noteworthy that Galaxy Entertainment Group Ltd (OTC: GXYEF) showcases a financial resilience that may interest investors. According to InvestingPro data, Galaxy holds a market capitalization of $19.09 billion and a robust gross profit margin of 76.16% for the last twelve months as of Q4 2023. These figures suggest a strong ability to generate revenue over its costs. Furthermore, the company's impressive revenue growth of 208.79% over the same period highlights its significant expansion, which could be a positive signal for future performance.
InvestingPro Tips for Galaxy Entertainment reveal that analysts expect sales growth in the current year and predict the company will be profitable this year. These insights, combined with the fact that Galaxy holds more cash than debt on its balance sheet, may provide some reassurance to investors concerned about the company's financial health. Additionally, the company is trading near its 52-week low, which might present a buying opportunity for those who believe in its long-term potential.
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