Genting Singapore - DBS Research 2016-08-05: Closing in on recovery

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GENTING SINGAPORE PLC G13.SI 

Genting Singapore - Closing in on recovery

• 2Q16 adjusted EBITDA down 61% y-o-y due to fall in VIP volumes and poor VIP win rate.
• But hold adjusted EBITDA stable q-o-q, signaling stabilisation and earnings close to bottom.
• Expect recovery in FY17 - growth in VIP volumes, win rate normalising and bad debts easing.

Cheap valuation at below -2 SD EV/EBITDA. 

• We upgrade Genting Singapore (GENS) to BUY from HOLD with a revised TP of S$0.91. 
• While GENS had weak 2Q16, there were positive signals as hold adjusted EBITDA was close to flat q-o-q and Macau is showing signs of stabilisation. Hence, we believe we are now close to seeing a potential recovery in earnings in FY17. 
• With GENS trading at forward FY17F EV/EBITDA of 8.7x, which is below –2 SD of its mean of 9.5x, the stock offers an attractive risk reward at current levels.

BUY ahead of earnings recovery in FY17. 

• Following two tough years, we believe now is the opportune time to buy into a highly cash generative business in a two player oligopoly. 
• We believe 2017 will mark a recovery in earnings (25% jump in adjusted EBITDA) due to 
  1. expected recovery in VIP volumes as volumes bottom out this year (we have penciled in a 3% improvement), 
  2. normalising of VIP win rate to the 2.85% theoretical rate from c.1.7% in 2Q16 and 
  3. easing of bad debts given GENS’ more selective and conservative credit policy over the past year.

Additional catalysts in the form of capital management. 

• With net cash of c.S$3.4bn, GENS is in a strong position to take advantage of opportunities in new casino markets. However, should the prospects of investing in a Japanese integrated resort remain elusive by next year, GENS may consider capital management initiatives, which could entail higher dividends or share buybacks. Either of these, we believe, will be an additional catalyst to re- rate the stock.

Valuation:

• To account for the better than expected cashflow generation and as we roll forward to FY17, we have raised our DCF-based TP to S$0.91 from S$0.79. 
• Our TP price implies a FY17F EV/EBITDA of 10.2x, close to -1.5 SD of 10.5x.

Key Risks to Our View:

• Decline in VIP and mass businesses. The key risk to our positive view is a slower than expected recovery or decline in GENS’ VIP and mass divisions.

Mervin SONG CFA DBS Vickers | http://www.dbsvickers.com/ 2016-08-05

DBS Vickers SGX Stock Analyst Report BUY Upgrade HOLD 0.91 Up 0.79