Genting Singapore - DBS Research 2017-05-15: Backing The House Is The Winning Card

Genting Singapore - DBS Vickers 2017-05-15: Backing The House Is The Winning Card GENTING SINGAPORE PLC G13.SI

Genting Singapore - Backing The House Is The Winning Card

  • 1Q17 adjusted EBITDA up 47% y-o-y to S$283m - above expectations.
  • Outperformance due to bad debts falling to multiyear lows and better margins offsetting soft volumes.
  • Share price rally still not over with GENS still trading at -1SD EV/EBIDA.



Rally not over yet. 

  • We maintain our BUY call on Genting Singapore (GENS) with a revised TP of S$1.35. 
  • While GENS’ share price has rallied by over 40% since our upgrade to BUY in August last year, we believe the rally can be sustained. 
  • Our view is underpinned by expected positive newsflow including continued recovery in earnings, details of GENS moving towards a more efficient capital structure, refresh of Resorts World Sentosa, and bid for a Japanese casino next year.


Where we differ – 


Sustainable earnings recovery. 

  • Consensus has a HOLD recommendation on GENS given concerns about the sustainability of its earnings recovery. 
  • We differ in this as GENS has been able to grow its earnings despite VIP rolling chip and mass business volumes still soft, through the successful execution of its cost reduction initiatives as well as lowering its bad debts given the implementation of a more selective and conservative credit policy last year. This structurally lower cost base provides a strong platform when volumes eventually bounce.

Still trading at depressed valuations. 

  • Despite the recent rally, GENS still offers compelling value, as it trades at 10.1x FY17F EV/EBITDA, which is in line with –1SD of its mean of 10.1x. In addition, it trades at a c.30% discount to its Macau peers on an EV/EBITDA basis which is close to -1SD of its mean EV/EBITDA differential. 
  • With earnings turnaround and the potential of winning the Japanese casino bid in the medium term, we believe GENS can re-rate closer to its average EV/EBITDA multiple of c.13x.


Valuation

  • On the back of a better than expected results, we raised our DCF-based TP to S$1.35 from S$1.20. 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.


WHAT’S NEW


Outperforms again Strong start to the year 

  • GENS reported 1Q17 adjusted EBITDA of S$283m which was up 47% y-o-y and 21% q-o-q. This was above expectations with 1Q17 adjusted EBITDA representing 31% of our full FY17F estimates.
  • The stronger than expected results was largely attributed to lower operating costs and bad debts despite gaming volumes remaining soft. In addition, VIP win rate was marginally higher y-o-y, coming in at 2.95% versus 2.9% in 1Q16. This resulted in adjusted EBITDA at Resort World Sentosa rising to 49% from 33% in 1Q16 and higher than our 41% estimate for FY17.
  • Due to the strong adjusted EBITDA performance, core profit (excluding exceptional) rose 135% y-o-y and 58% q-o-q to S$146m.

Bad debt falls to multi-year low, offsetting soft volumes 

  • On the back of GENS’ successful implementation of its tighter credit policies, impairment of trade receivables fell to S$15m, the lowest since the opening of Resort World Sentosa.
  • This offset the 24% y-o-y drop in VIP rolling chip volumes to S$4.9bn, which was relatively flat q-o-q.
  • In addition, overall mass gross gaming revenue (GGR) remains soft, falling q-o-q, with the mass business maintaining its market share in the 38% range.

Redemption of perpetual securities as expected 

  • As anticipated, GENS announced that it will redeem its S$2.3bn worth of outstanding perpetual securities in September and October this year. We had believed GENS would call back its perpetual securities to protect its reputation in the bond market but also to save c.S$118m worth of coupon payments on an annual basis when it has no immediate capital needs, and could issue bonds/raise bank debt at a lower interest rate.
  • We believe the redemption is the first step towards GENS announced intention to move towards a more efficient capital structure.
  • While GENS has yet to announce details of its exact plans, we envisage GENS moving towards a modest gearing target.
  • With S$4.7bn worth of net cash as at end March 2017, GENS is in a strong financial position to redeem its perpetual securities.

Potential refresh of Resorts World Sentosa 

  • During the 1Q17 results call, management announced that it is considering a refresh of its Resorts World Sentosa (RWS) property. While exact details of the refurbishment have not been disclosed such as new attractions, hotels or conference facilities as well as the total costs, we believe this investment may enhance RWS’s competitive position especially given rising regional competition and potentially take earnings for the property to the next level.

3 Scts annual dividend this year but we do not rule out a positive surprise next year 

  • GENS guided that it remains comfortable distributing 3 Scts per share in annual dividend.
  • However, with earnings expected to increase next year and subject to the size of any potential Japanese casino investment, we believe GENS has the potential to surprise investors on the upside. We have penciled 3.5 Scts dividend next year.

Japan integrated resort update 

  • GENS guided that the problem gaming bill is expected to be tabled in the current diet session with no significant opposition for this bill. Following this, an executive bill is expected to be tabled in the extraordinary session in autumn with bidding for an integrated resort potentially starting in the middle of 2018.
  • Beyond this, GENS also noted that there needs to be further clarity on whether a consortium can bid for multiple sites as it appears any bidding consortium needs to jointly seek approval from the national government with individual cities/prefectures.

Raising earnings estimates and increasing TP to S$1.35 

  • On the back of the stronger than expected 1Q17 results, we raised our FY17-18F adjusted EBITDA by 5-13%.
  • We now incorporate bad debts of c.S$15m per quarter which is in line with management guidance and lower than our earlier estimate of S$35m per quarter. 
  • In addition, due to the slow start in volumes this year, we now assume 0% and 1.5% y-o-y growth in VIP rolling chip and mass volumes respectively versus 3% previously. However, we still expect 3% bounce in volumes next year.




Melvin SONG CFA DBS Vickers | http://www.dbsvickers.com/ 2017-05-15
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 1.35 Up 1.200



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