Genting Singapore (GENS SP) - UOB Kay Hian 2017-02-23: 4Q16 In Line With Expectation; All Eyes On Japan

Genting Singapore (GENS SP) - UOB Kay Hian 2017-02-23: 4Q16: In Line With Expectation; All Eyes On Japan GENTING SINGAPORE PLC G13.SI

Genting Singapore (GENS SP) - 4Q16: In Line With Expectation; All Eyes On Japan

  • 4Q16 results were within expectation. Genting Singapore (GENS) managed to maintain last quarter’s decent EBITDA despite a mild qoq drop in gaming revenue. 
  • While gaming volume growth may not be inspiring, lower provisions and sustained cost efficiency will provide earnings stability in 2017. 
  • We are pleased with a sustainable 3-cent dividend going forward and its strong position in the bidding for the integrated resort in Japan. 
  • Maintain HOLD with a higher target price of S$1.01. Entry price: S$0.90-0.95.



RESULTS


Largely in line. 

  • Genting Singapore (GENS) reported core adjusted EBITDA of S$234m in 4Q16 and S$779m in 2016, or 3% above our full-year forecast. 
  • Despite a dip in gaming revenue, EBITDA was flat and margins improved qoq, thanks to lower provision and better cost efficiency. The significant yoy jump in 4Q16 PBT was due to forex gains (4Q15: forex losses and losses from disposal of financial assets). 

VIP: The worst could be over albeit growth is unexciting. 

  • For the VIP segment, management guided that current volumes are sustainable. We estimate VIP rolling chip volume could have dropped 22% yoy but risen 20% qoq in 4Q16 from the all-time low in 3Q16. 
  • While we agree with management that the RCV is sustainable, we do not expect a meaningful volume growth. Win rate was 2.8% in 4Q16 (3Q16: 3.3%, 4Q15: 2.1%).

Mass market: Volume remains unexciting. 

  • Mass-market GGR in 4Q16 saw a mild qoq increment but still dropped at high single digit yoy. 
  • Management shared that despite stable visitor arrivals, customers are cutting their spending, mainly due to the strengthening of the Singapore dollar vs that of neighbouring countries, particularly the ringgit. 
  • Going forward, GENS will continue to focus on attracting premium-mass customers and commits to invest more in its Resort World Sentosa (RWS) properties. For example, Maritime Experiential Museum is undergoing renovations and will re-open in end-17. 
  • GENS has more potential investment plans for RWS, subject to government approval.

Final DPS of 1.5 cents. 

  • GENS declared a final dividend of 1.5 cents, bringing full-year DPS to 3.0 cents, representing an EBITDA payout of 87% and a dividend yield of 3.1%.
  • Management guided dividend of 3.0 cents is sustainable over the next few years.

Bad-debt provision dropped to S$39m, expected to be lower going forward.

  • Unsurprisingly, bad-debt provision dropped to S$39m in 4Q16, from 3Q16’s S$50m. We agree with management’s guidance that future provisions would not be higher than 4Q16’s. 
  • We expect provisions at around S$30m quarterly in the next few quarters.


STOCK IMPACT


More updates on Japan’s greenfield opportunity. 

  • GENS is interested in bidding for the integrated resort in Osaka and for the one in Yokohama if opportunity rises. GENS expects the second debate in the parliament to start earliest in Aug-Sep 17. 
  • GENS is comfortable with investments that provide IRR of 10-15%. GENS is open for a minority stake in the Japan project but the stake has to be meaningfully enough.

Could be a strong contender for the integrated resort in Japan... 

  • GENS could be a strong contender for the Japanese resort, given its strong balance sheet to fund the projects and track record in developing integrated resorts. However, we acknowledge that GENS has strong competitors who have also expressed their keen interest in the bidding.

…which could cost US$7b-12b. 

  • Management shared that the project could cost US$7b- 12b as the land itself would already cost US$2b-3b. Assuming an equity/debt structure of 30:70, the project would require internal funds of US$2.1b-3.6b. This could be supported by GENS’ cash pile of S$2.6b (excluding perpetual securities) and strong operating cash flow.

Likely to redeem perpetual securities. 

  • After studying its capital structure, management shared that GENS would be able to redeem its perpetual securities (from Sep 17) and still maintain its dividend payment and with sufficient funding to bid for the resort project in Japan. 
  • The redemption would enhance GENS’ cash flow, given that it currently pays S$118m annually in interest to perpetual securities holders.


EARNINGS REVISION 

  • No change to our forecasts. We also introduce 2019 numbers.


VALUATION/RECOMMENDATION

  • Maintain HOLD with a higher target price of S$1.01 (previously S$0.91) as we now impute an 10-cent Japan ‘option value’ into our target price (assuming 30% success rate, US$10b development cost with 18% ROIC and 50% JV stake). 
  • Our target price implies EV/EBITDA of 11.6x and 10.8x in 2017-18 respectively. 
  • Entry price is S$S$0.90-0.95.




Vincent Khoo CFA UOB Kay Hian | Yeoh Bit Kun UOB Kay Hian | http://research.uobkayhian.com/ 2017-02-23
UOB Kay Hian SGX Stock Analyst Report HOLD Maintain HOLD 1.01 Up 0.91



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