Genting Singapore - Take money off the table
- Genting Singapore (GENS) has sold its stake in RWJ for US$411m (S$596m), resulting in a S$96m gain.
- The sale is intended to beef up its balance sheet for a potential casino bid in Japan.
- While expansion into Japan could provide positive newsflow, we think the benefits will take time to be recognised. Meanwhile, GENS could incur startup costs first.
- We see little margin expansion at RWS as most cost savings have been recognised.
- We downgrade GENS from Add to Hold. We switch from an SOP valuation to DCF following the disposal of RWJ. Our TP rises to S$0.93 (WACC: 7.6%, g: 1.5%).
Completed disposal of RWJ for S$96.3m gain
- GENS disposed of its 50% stake in Resorts World Jeju (RWJ) for a consideration of S$596.3m, and will record a S$96.3m gain on the sale in 1Q17.
- We remove investment assumptions and JV contributions that we had previously built in for RWJ, and factor in the gain. Our FY17-18F core EPS falls 15-17% as a result, but our DCF-based target price rises to S$0.93 with the higher cash balance from sale proceeds.
Exit from RWJ to focus on Japan bid
- We are positive on GENS’s exit from RWJ as:
- Recent restrictions on Chinese nationals’ outbound travel to South Korea present some challenges for RWJ. Chinese tourists were its target audience due to its location being 1-2 hours flight away from major cities in northeast China.
- GENS monetised its investment in RWJ without having to face the operational risks.
- We estimate GENS now has a net cash balance of S$4.2bn which will strengthen its position against rivals in a casino bid in Japan.
Japan will take time, startup costs will hit first
- We think Japan is likely to be a medium term story as:
- a bill detailing casino laws will be debated in parliament in 2017,
- several cities, including Tokyo, Sapporo, Osaka and Yokohama will submit proposals to host the integrated resort (IR), and
- the winning cities will then choose companies to build and manage the IR.
- Even if GENS made a successful bid, we think it could incur startup costs prior to the IR opening, which we believe would be in 2022-23F at the earliest.
Unlikely to redeem perpetuals until it can obtain project financing
- GENS has S$2.3bn in perpetual bond issuance bearing 5.125% interest, and is callable on 12 Sep 2017 or subject to a step-up to 6.125% on 12 Sep 2022.
- We think GENS is unlikely to redeem it at the first callable date given that it will undermine its balance sheet strength prior to a successful bid in Japan. Rather, we think it could turn to project financing if it secures a bid, and likely at a lower rate than the 5.125% it is now paying.
Little upside at RWS; cost savings have mostly been recognised
- 3Q16 was a stellar quarter at Resorts World Sentosa (RWS), registering adjusted EBITDA margin of 40.2% – the highest in nine quarters. This was largely due to cost rationalisation efforts in the VIP business, which includes scaling down manpower, rationalising processes and lowering utility bills.
- We think the bulk of cost savings have been recognised in 3Q16, with little room to cut costs further. Bad debt charges have also reached a healthy level of S$50m, leaving little room for improvement, in our view.
Downgrade from Add to Hold
- GENS’ share price has done well since Nov 2016 driven by record EBITDA margins, its commitment to paying higher dividends and the passing of the casino bill in Japan.
- We switch from an SOP valuation to DCF following the sale of its stake in RWJ. Our target price rises slightly to S$0.93 (WACC: 7.6%, g: 1.5%) to factor in the gain.
- Upside/downside risks include higher/lower GGR at RWS and dividends.