Fitch Ratings anticipates a positive shift in Macau’s SJM Holdings’ financial trajectory, projecting a turn to free cash flow positivity in 2024. This pivotal development is expected to empower the company to strategically focus on reducing its debt balance in the subsequent years. Fitch has revised SJM’s outlook from Negative to Stable and maintained its ratings at “BB-“, citing improved visitation and gaming revenue in Macau and the successful ramp-up of the Grand Lisboa Palace (GLP) integrated resort as key contributors.
Revised Outlook and Ratings:
The ratings agency, in a Thursday note, highlighted the elevated vulnerability to default risk but acknowledged SJM’s business and financial flexibility to meet its commitments. Fitch’s revision is underpinned by the robust recovery in Macau’s visitation and gaming revenue, fueled by the continued growth of SJM’s GLP, which commenced operations in 2022. The outlook revision reflects confidence in SJM’s ability to manage its leverage metrics within the “BB-” threshold in the coming years.
Factors Driving Positive Outlook:
Fitch attributes the positive outlook to the substantial recovery in Macau’s visitation and gaming revenue, coupled with the ongoing success of SJM’s GLP. The agency foresees SJM’s leverage metrics aligning with the “BB-” threshold, fueled by the anticipated growth in Adjusted EBITDA from HK$1.7 billion in 2023 to an estimated HK$3.6 billion in 2024, HK$5.2 billion in 2025, and HK$6.6 billion in 2026.
Positive Cash Flow Projections:
Fitch projects SJM’s free cash flow to turn positive in 2024, marking a pivotal milestone for the company. The agency anticipates a further expansion of free cash flow in 2025-2026, contributing to a reduction in debt balance from HK$29 billion at the end of September 2023 to HK$26 billion at the end of 2025 and HK$23 billion at the end of 2026. SJM’s commitment to a conservative financial policy is expected to drive its deleveraging efforts.
Strategic Focus on Deleveraging:
Fitch emphasizes SJM’s strategic priority of deleveraging, aligning with the company’s conservative financial policy. The anticipated positive cash flow and debt reduction initiatives position SJM on a trajectory of financial stability and resilience in the dynamic Macau gaming landscape.
Key Role of Grand Lisboa Palace (GLP):
The successful performance of GLP is identified as a key catalyst in SJM’s improved outlook. With a market share of 1.6% in Macau-wide Gross Gaming Revenue (GGR) during 3Q23, SJM management aims to grow this share to between 5% and 6% in the long term. Improved connectivity and enhanced mass appeal through diverse offerings such as food and beverage, retail, and events are expected to drive this growth.
Recovery and Growth Targets for 2024:
SJM’s self-promoted casinos, including the flagship Grand Lisboa on the peninsula, are projected to recover to 95% of pre-COVID levels in 2024, up from 91% in 3Q23. The company is strategically addressing challenges from satellite casinos, aiming to absorb staff costs through attrition and redeployment by 2025, further supporting its debt reduction efforts.
Fitch Ratings’ positive outlook on SJM Holdings signals a turning point for the company, poised for positive cash flow and a strategic focus on reducing debt in 2024. With key contributions from GLP, anticipated growth in EBITDA, and a commitment to deleveraging, SJM navigates towards financial stability and resilience in the competitive Macau gaming market. The coming years will likely witness the realization of these projections, underscoring SJM’s ability to adapt and thrive in a dynamic industry landscape.