Genting Singapore - Sticking to SELL
- Casinos to open only in early 2020s.
- Overly aggressive share rally.
- Expensive on EV/EBITDA basis.
Japan legalizes casinos
- Japan finally legalized casinos yesterday, with proponents hoping to pass further legislation next year that would enable the first casino to open in the early 2020s.
- We expect that licenses will only be awarded late 2018 or 2019 at the earliest.
- For Singapore’s Marina Bay Sands and Sentosa, the time from the request-for-concept to the distribution of licenses took around 1.5 – 2 years, and an additional 3 – 4 years was needed for construction.
Will GS get a license? Still up in the air
- We expect participation by international gambling operators to be limited to JVs with Japanese partners, given resistance to the idea of 100% foreign-owned casinos during the parliamentary debates.
- On the other hand, we note that Japan has singled out Singapore as a role model with its integrated resorts concept, and may pay special attention to both Genting Singapore (GS) and Las Vegas Sands (LVS) as contenders.
- Nonetheless, GS’s continued decline in market share is a point in favor of Las Vegas Sands should they compete for the same site.
- Possible sites for a casino include Tokyo, Osaka, and Yokohama; GS’s experience with Universal Studios may be more relevant for Yokohama, given Tokyo’s Disneyland and Osaka’s Universal Studios Japan.
Fair value stays at S$0.75
- Even assuming that our 4% terminal growth rate does not already reflect greater growth opportunities for the company, GS’s current price in excess of our fair value seems to imply an optimistic 40% chance of winning a Japan casino license, based on our rough estimates given the lack of details at this point.
- Furthermore, while there are many reasons for selling one’s holdings, we also note that COO Tan has disposed 10m out of his 12m shares in GS on 28/29 Nov for proceeds of S$9.6m, suggesting that an insider may deem ~S$0.96 a favorable price to divest.
- Prudent investors would do well to take profit now; GS is trading at a consensus blended forward EV/EBITDA of (11.5x) – a 34% premium to its 2yr average of (8.6x) and a 15% premium to its 5yr average (10.0x).
- We maintain SELL on Genting Singapore with an unchanged fair value of S$0.75.