Genting Singapore (GENS SP) - 1Q17 Fuelled By Further Cost Efficiency
- GENS’ 1Q17 results beat expectations due to better cost efficiency although top-line remained predictably sluggish. 1Q17’s core EBITDA margin rose to a 3-year high, led by lower impairment on receivables and surprisingly further operating cost savings.
- VIP’s gaming volume remained sluggish in 1Q17, but mass market GGR managed a pleasant (seasonally) sequential uptick.
- Maintain HOLD with a higher rolled-over TP of S$1.15, but shares would likely be sidelined for the rest of 2017.
- Entry price: S$1.05.
- Genting Singapore (GENS) reported a 1Q17 core adjusted EBITDA of S$283m (+21% qoq, +45% yoy), representing 31% of our full-year forecast, even though revenue was within our expectation. We attribute the positive surprise to further cost efficiency initiatives.
- Core EBITDA margin at its highest since 2Q14. 1Q17’s core adjusted EBITDA margin at 48% is the highest since 2Q14. The margin improvement also reflects lower impairment of receivables.
Impairment of receivables dropped to S$15m.
- Impairment of receivables was merely at S$15m in 1Q17 (4Q16: S$39m, 1Q16: S$92m), slightly below our expectation of S$17m, thanks to the tightened credit policy and the revision of commission fee model that incentivises early repayment.
- Management expects 1Q17’s impairment level to be sustainable moving forward.
VIP: Volume remains soft.
- Unsurprisingly, VIP segment’s rolling chip volume (RCV) remained soft in 1Q17. We estimate that GENS’ 1Q17 RCV dropped 24% yoy due to last year’s high base.
- On a qoq basis, RCV was relatively flat but VIP gross gaming revenue (GGR) was about 5% higher due to better luck factor in 1Q17. Win rate was 2.95% in 1Q17 (4Q16: 2.80%, 1Q16: 2.90%).
Mass market: GGR improved qoq but down yoy.
- In 1Q17, mass market’s GGR dropped 9% yoy. On a qoq basis, mass market GGR advanced 9%, mainly driven by the premium mass market. However, we note that the first quarter of the year usually sees higher mass market volume than the fourth quarter.
- All in all, GENS’ gaming revenue dropped 4% yoy but improved 9% qoq in 1Q17. GENS’ total GGR market share stood at 38% (4Q16: 36%, 1Q16: 40%).
Redemption of S$2.3b perpetual securities; efficient capital management.
- GENS announced its intention to redeem perpetual securities of S$1.8b and S$500m, which has call dates of 12 Sep 17 and 18 Oct 17 respectively. Post the redemption, GENS will still be sitting on a strong net cash pile of S$2.3b, based on 1Q17’s balance sheet. This provides GENS flexibility to gear up, if need be, for its bid for Japan’s integrated resort (IR).
- We welcome GENS’ redemption as part of its effort for better capital management. The redemption enhances GENS’ cash flow, given that it currently pays S$118m in interest to its perpetual securities holders p.a..
Dividend of 3 cents per share is sustainable.
- Management shared that GENS is comfortable in dishing out 3.0 S cents dividend per share (DPS) moving forward, same as 2016’s. The possibility for DPS extending beyond 3.0 S cent is highly dependent on the progress of Japan’s IR bidding.
GENS is positive on the timeline of Japan IR development process…
- GENS is positive on the development progress of the establishment of casino gaming industry in Japan. It is anticipated that the second bill that writes the legislation governing IRs will be passed in the Diet session this autumn and bidding could be probably start by mid-18.
…but the excitement begins only post-18 and clarifications are still needed on bidding.
- The IR bidding involves a two-stage process. The prefectural governments that have interests in hosting IRs would have to select the casino operators that they want to work with, and subsequently, the prefectural governments together with the casino operators would have to propose to the federal government to host an IR.
- For now, it is still unclear whether a casino operator would be totally eliminated from the Japan IR bidding should the prefecture that it is tied with not be chosen for an IR location.
- In terms of the potential shareholding structure with Japanese local partner, it remains open for GENS.
Japan greenfield opportunity to serve as a long-term catalyst.
- We view that the Japan greenfield opportunity will only serve as a long-term catalyst as the selection of IR operators should only take place by 2019 with the opening of the IR in 2022-23.
- We revise our EBITDA forecast upward by 12-13% in 2017-19 to reflect lower operating costs.
- Maintain HOLD on GENS with higher target price of S$1.15 (previous TP: S$1.01) as we increase our earnings forecast and roll forward our investment time horizon.
- Our TP has imputed a 10 S cents Japan ‘option value’ (assumption: 30% success rate, US$10b development cost with 15% ROIC and 50% JV stake).
- Target price of S$1.15 implies EV/EBITDA of 11.8x and 11.1x in 2017-18, respectively. Entry price: S$1.05.