Genting Singapore (GENS SP) - UOB Kay Hian 2016-11-04: 3Q16 Above Expectations On Luck Factor And Cost Efficiency

Genting Singapore (GENS SP) - UOB Kay Hian 2016-11-04: 3Q16: Above Expectations On Luck Factor And Cost Efficiency GENTING SINGAPORE PLC G13.SI

Genting Singapore (GENS SP) - 3Q16: Above Expectations On Luck Factor And Cost Efficiency

  • GENS’ 3Q16 results beat our expectation, driven by luck factor and a better margin due to cost rationalisation. 
  • While gaming volume remains uninspiring, lower provisions and sustained cost efficiency will support earnings stability moving forward. 
  • GENS pleasantly surprised by declaring a 1.5 S cents DPS and aims to dole out a final dividend, which we believe are important relating catalysts. 
  • Maintain BUY. Our target price remains unchanged at S$0.84.



RESULTS


Above expectations despite sluggish gaming volumes. 

  • Genting Singapore (GENS) reported a 3Q16 core adjusted EBITDA of S$234m, the first decent EBITDA (above S$200m) since 4Q15. 9M16 core adjusted EBITDA was S$545m, representing 80% of our 2016 EBITDA. 
  • GENS’ adjusted EBITDA doubled qoq and grew 12% yoy due to a combination of factors: 
    1. a higher win percentage; 
    2. improving cost efficiency due to 2Q16’s cost rationalisation; and 
    3. lower provisions for doubtful debt. 
  • 3Q16 hold adjusted EBITDA was S$215m, consistent with our 2017 projection. We understand that the net VIP: Mass GGR mix was at 23:77.

VIP: Mainly aided by luck factor, weak volume persists. 

  • GENS’ VIP rolling chip volume saw a mid-teens qoq decline to hit a record low in 3Q16, after having touched a new low in 2Q16. However, the weak volume was offset by an exceptionally good win rate of 3.3%, the highest since 2Q12 (2Q16: 1.7%, 3Q15: 2.8%).

Mass market: Volume still softening. 

  • GENS’ mass market non-rolling chip volume saw a low single-digit qoq decline, extending 2Q16’s already weakened mass market performance. Mass market GGR had been on a steady climb until 2Q16 – plodding yoy quarterly growth from 2Q14 to 1Q16 (except 4Q15), but this changed in 2Q16. We reckon that the weakened trend reflects softer domestic patronage (perhaps tied to the fallout of the O&G segment from the economy). Moreover, we assess that GENS faced a low single-digit market share loss to rival MBS in 3Q16.
  • A surprising 1.5 S cents interim DPS, plus guidance for a potential final dividend, are key re-rating catalysts. GENS' interim dividend 1.5 S cents (yield of 2.0%; its first ever interim dividend), was a welcomed surprise.

Started to see meaningful impact from cost rationalisation initiatives. 

  • On a more positive note, despite the drop in qoq gaming volume, GENS’ hold adjusted (luck adjusted) EBITDA still improved by S$23m in 3Q16. 
  • We believe this largely came from the savings from its cost rationalisation initiatives that were carried out in the last quarter, as bad debt provision came down by merely S$3m qoq.


STOCK IMPACT

  • Capital management to drive some recovery in valuations, although current payout ratio is unsustainable. We are encouraged by the company’s “walk the talk” approach on capital management. On top of the 1.5 S cents interim DPS, we expect GENS to declare a final dividend. 
  • Management shared that GENS will establish a dividend policy, but is still in the midst of deciding on a payout ratio. However, the current earnings payout ratio is unlikely to be sustainable (168% payout of 9M16 earnings). Particularly, GENS would need to maintain a strong balance sheet should the Japanese government legalise casino operations in the country. 
  • As at end-Sep 16, GENS had net cash of S$3.6b. We penciled in a DPS (in S cents) of 2.5/2.0/2.0 in 2016/17/18. 2017/18 dividend represents a 52%/47% earnings payout.

Expecting provisions to be significantly lower from next quarter onwards. 

  • 3Q16’s provisions had dropped $42m yoy and $3m qoq to S$54m in 2Q16. Management guided that provisions will continue to decline in the next two quarters and we agree with this guidance. With its strategy of remaining cautious with giving out credit and with current receivables at only S$234m (see sidebar chart), we expect GENS’ provisions to drop to S$25-30m in the next two quarters. 
  • We remain cautious on gaming volume but expect margin to improve. We remain unexcited about casino gaming volume for both the VIP and mass markets. We view that Singapore is experiencing a cycle which differs from Macau’s, and is unlikely to show a meaningful yoy mass market recovery in the upcoming quarters, unlike Macau. 
  • We expect gaming volume for VIP and mass markets to grow by 0% and 1% in 2017 respectively, despite 2016’s low base. However, we believe that the lower provisions and higher cost efficiency will still lead to EBITDA growth in 2017.

Focus on premium mass market; position itself as Asia’s premium lifestyle destination. 

  • GENS will continue with its effort to develop the premium mass market, including reinvestments for its RWS properties. GENS’ Maritime Experiential Museum is scheduled to unveil its fully refurbished facility with renewed offerings by end-17. GENS is also exploring other investments in RWS but no details on capex plan have been revealed yet.

Optimistic on Japan greenfield opportunity. 

  • Management shared that their optimism on the prospects of the legalisation of casinos in Japan is at its highest in seven years.
  • The bill on casino legalisation will be debated at a parliamentary session next week and management believes there is a good chance of it being passed by parliament.

Setback for Jeju project. 

  • GENS’ Jeju JV project saw a setback due to a typhoon which hit last month. Construction progress was affected and the residential properties sales were impacted as well. Damages will be covered by insurance but more details will only be known by the month-end.


EARNINGS REVISION

  • We raise our EBITDA forecast by 11% for 2016 to reflect 3Q16’s good win percentage and sustainability of cost rationalisation initiatives. We make change to our 2017-18 forecasts.


VALUATION/RECOMMENDATION

  • Maintain BUY with an unchanged target price of S$0.84, which implies 10x 2017F EV/EBITDA.




Vincent Khoo CFA UOB Kay Hian | Yeoh Bit Kun UOB Kay Hian | http://research.uobkayhian.com/ 2016-11-04
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 0.840 Same 0.840




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