Genting Singapore - Onwards and upwards
- 4Q16 adjusted EBITDA of S$233.7m (+29% y-o-y) above expectations.
- FY16 DPS of 3 Scts, above consensus estimate of 2.5 Scts but moderating prospects for higher DPS on potentially larger investment in Japan casino.
- Focus on growing top line with bad debts under control and right sizing overheads.
More efficient capital structure to trigger further re-rating.
- We maintain our BUY call on Genting Singapore (GENS) with a revised TP of S$1.20.
- GENS announced that it will be moving towards a more efficient capital funding model over the next three years.
- However, it indicated that it may not lift its DPS beyond the 3 Scts in the near term to reserve extra liquidity ahead of a potential bid for a Japanese casino.
- While this is disappointing, we believe GENS could potentially gear up its balance sheet to a modest level, which should result in better ROEs, triggering a further re-rating of the stock.
Ride on sustained earnings recovery in 2017.
- While GENS’s share price has rallied over 25% since we upgraded GENS to BUY in August 2016, we believe the re-rating will continue on the back of sustained earnings recovery in 2017.
- Improved profitability in 2017 (17% jump in adjusted EBITDA) will be driven by
- recovery in VIP volumes (we have penciled in a 3% uplift) as management is now focusing on growing its top line,
- VIP win rate normalising to the 2.85% theoretical rate from c.2.67% in 2016, and
- (lower bad debts given GENS’s more selective and conservative credit policy over the past year.
Still trading on depressed valuations.
- Despite the recent rally, GENS still offers compelling value, as it trades at 10.2x FY17F EV/EBITDA, which is below –1SD of its mean of 10.4x. In addition, it trades at a c.30% discount to its Macau peers on an EV/EBITDA basis which close to -1SD of its mean EV/EBITDA differential.
- With increasing dividends, earnings turnaround and potential of winning the Japanese casino bid in the medium term, we believe GENS can rerate closer to its average EV/EBITDA multiple of 13.0x.
- On the back of a better than expected results, we raised our DCF-based TP to S$1.20 from S$1.15. Our valuation excludes any Japan casino.
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’s VIP and mass divisions.