Melco Resorts & Entertainment: It's All About Deleveraging (Rating Upgrade)

Melco Resorts & Entertainment (MLCO) has been upgraded to a 'Buy' rating, predicated on its strong potential for debt reduction and subsequent valuation re-rating. The company's current net debt-to-EBITDA of 5.8x (2Q25) is expected to decline significantly, driven by a projected $1 billion divestment of its Philippine operations and robust operational performance, including a forecasted 28% YoY normalized EBITDA growth in 2H25 amid Macau's GGR recovery. This deleveraging and improved financial outlook are anticipated to close MLCO's valuation gap, potentially expanding its EV/EBITDA from 7.7x towards a peer median of 9.9x.

Analysis

Melco Resorts & Entertainment (MLCO) presents a compelling deleveraging narrative that could catalyze a significant valuation re-rating. The company currently trades at a discounted 7.7x next-twelve-months' EV/EBITDA, substantially below its pre-pandemic average of 11.8x and the peer median of 9.9x. This discount is directly linked to its high leverage, with a net debt-to-EBITDA ratio of 5.8x as of the second quarter of 2025. A primary catalyst for balance sheet repair is the ongoing strategic review of its Philippine operations, "City of Dreams Manila," a non-core asset contributing less than 10% of group EBITDA. The potential monetization, reportedly for around $1 billion, would make a substantial impact on its nearly $6 billion in net borrowings, with the process appearing advanced given a "short list of potential buyers" has been identified. This is complemented by a favorable operational outlook, as management guides for debt paydown from free cash flow in the second half of 2025. This guidance is supported by an accelerating recovery in Macau, which accounts for 86% of MLCO's EBITDA, where gross gaming revenue (GGR) growth accelerated to 19% and 12% in July and August, respectively. Furthermore, MLCO aims to expand its current 15% market share in Macau by leveraging high-profile events at its Studio City property, which could provide incremental cash flow for faster debt repayment.

Key Decisions for Investors

• Investors could consider MLCO's valuation attractive, as successful execution of its deleveraging strategy via asset sales and improved free cash flow could drive its EV/EBITDA multiple from 7.7x toward the peer median of 9.9x.
• Closely monitor announcements regarding the divestment of the "City of Dreams Manila" property, as the timing and final sale price are the primary catalysts for accelerated debt reduction and closing the valuation gap.
• Track Macau's monthly Gross Gaming Revenue data and MLCO's reported market share to validate the operational recovery thesis and assess the company's ability to generate the free cash flow needed for its debt paydown initiatives.
• Key risks to the bullish thesis include any shift in management's capital allocation priorities away from debt repayment or a significant economic slowdown in China that could dampen gaming demand.