Genting Singapore - On a steady course for a re-rating
- 4Q16 adj. EBITDA was in line with our expectations, thanks to ongoing cost efficiency initiatives. Adj. EBITDA margin grew to 41.9% (vs. 40.2% in 3Q16).
- FY16 core net profit formed 104%/118% of our/consensus full-year forecasts, broadly in line with our expectations.
- Surprise final DPS of 1.5Scts brings FY16 DPS to 3.0Scts.
- Upgrade to Add and target price raised to S$1.11, based on 9x FY18F EV/EBITDA.
Staying steady with cost efficiency initiatives
- 4Q16 adj. EBITDA of S$233.7m (flat qoq, + 28.9% yoy) was a testament to GENS’s cost efficiency initiatives.
- 4Q16’s gaming and non-gaming revenue fell 2%/9%, likely on a lower VIP win rate of 2.8% (3Q16: 3.3%) and a lower mass GGR as Malaysian spend/visitor numbers fell due to S$/RM forex.
- However, the EBITDA margin grew to 41.9% (3Q16: 40.2%) due to a 17% qoq drop in expenses driven by lower impairment of loss in trade receivables (-23% qoq) and administrative costs (-22%).
VIP business fully calibrated; premium mass remains a focus
- GENS believes it has restructured the VIP business, having successfully reduced its bad debts and account receivables levels.
- In 2017, management said it will focus on growing VIP revenues instead of collections. It will also continue to pursue the premium mass segment by reinvesting in the integrated resort.
- The Maritime Experiential Museum is still scheduled to undergo complete renovation and will re-open with all new content in end-2017.
All eyes on Japan
- GENS is determined to gain a spot in Japan and is fully committed to a strong bid when the time comes (by 2018).
- Eyes are on Osaka but GENS is not ruling out participating in Yokohama should tender bids emerge. GENS believes
- its track record as a successful integrated resorts player in Singapore, and
- its hefty cash pile of c.S$5.0m will make it a strong contender.
- Management said that it expected investment for the Japan casino to range at US$7bn-12bn, and believe project IRRs could be 10-15%.
Higher DPS going forward
- GENS surprised with a 1.5Scts DPS in 4Q16, bringing the full-year DPS to 3.0Scts. This represents an all-time high payout ratio of 135% on FY16 core EPS and trumps the historical DPS of 1-2Scts for FY14-15.
- Management has guided for 3Scts DPS for the coming years to reward shareholders.
Trading below historical 5-year EV/EBITDA mean
- We estimate the stock currently trades at an FY18F EV/EBITDA of c.7x (excluding perpetuals), below its historical average 5-year mean of 11.5x.
- We believe the stock should trade up to at least the -1 s.d. level of c.9x given EBITDA margins are recovering to levels in FY14.
- We also note that the stock traded higher in FY14 during the last time Japan was tabling the casino bill.
Upgrade to Add from Hold
- We lift our FY17-18 EPS estimates by 12-16%, largely as we expect costs to come off.
- We introduce FY19F forecasts. With our transfer of coverage, we also switch from a DCF valuation to EV/EBITDA as we believe that this better reflects GENS’s cash generative business and captures its re-rating closer to the bidding for the casino in Japan. At 9x FY18F EV/EBITDA (-1 s.d. from 5-year mean), our target price is S$1.11.
- Downside risks include lower-than-expected EBITDA margins and failure in Japan.