Genting Singapore - DBS Research 2017-08-03: Starting The Growth Engine

Genting Singapore - DBS Vickers 2017-08-03: Starting The Growth Engine GENTING SINGAPORE PLC G13.SI

Genting Singapore - Starting The Growth Engine

  • 2Q17 adjusted EBITDA up 152% y-o-y to S$293m which was ahead of expectations.
  • VIP volumes still soft but win rate was better than expected.
  • With bad debts under control, GENS guiding that is now focused on selectively growing its VIP business.



Rally not over yet. 

  • We maintain our BUY call on Genting Singapore (GENS) with a revised TP of S$1.45. While GENS’ share price has rallied by over 40% since our upgrade to BUY in August last year (see report: Genting Singapore - Closing in on recovery) 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.


WHAT’S NEW


Strong performance continues into 2Q17 Beats expectations again

  • GENS had another strong quarter with 2Q17 adjusted EBITDA jumping 152% y-o-y and 3% q-o-q to S$293m. This was above expectations, with 1H17 adjusted EBITDA comprising 56% and 55% of our and consensus FY17F estimates respectively.
  • The stronger than expected results was largely attributed to a stronger than expected win rate in the VIP and mass business. The VIP win rate for 2Q17 was 3% at the upper band of the theoretical win rate range and higher than our 2.85% estimate. In addition, the mass business had a win rate closer to 27-28% level versus our 25% estimate.
  • Overall, as expected, the main driver for an improvement in adjusted EBITDA was a fall in bad debts (S$15m versus S$54m in 2Q16 but flat q-o-q) as well as recovery in the VIP win rate which stood at 1.7% in 2Q16
  • Meanwhile, VIP rolling chip continues to disappoint, falling an estimated 12% y-o-y with the rolling chip market share remaining below 40% at 34%. In addition, combined mass and slots handle was down c.1% y-o-y.
  • On the back of the stronger adjusted EBITDA, normalised 2Q17 NPAT (excluding exceptional items) jumped to S$158m from S$0.8m in 2Q16.
  • GENS declared an interim dividend of 1.5 Scts which was in line with expectations.

Refocusing on growth again

  • While GENS remains cautious on the VIP business, it will look to grow its business again. In particular, it may look to selectively extend credit to the right VIP customers. Furthermore, the company will continue to target the premium mass market.
  • In addition, earnings growth going forward should be underpinned by benign bad debts which GENS has guided should remain at S$15m per quarter level or lower. This is also further supported by the redemption of $2.3bn worth of perpetual securities in September and October.

Uplift to earnings estimates

  • On the back of the stronger than expected 1H17, we raised our full year win rate for both the VIP and mass business. This is tempered by slower assumed VIP rolling chip growth. While management has guided that it intends to grow its VIP business selectively, the slow start to the year results in our VIP rolling chips growth assumption being lowered from 0% to -5%. 
  • For FY18, we still maintain our 3% growth rate as management appears to have increased its focus to grow this business after getting its bad debts under control. These changes lead us to raise our FY17-18F adjusted EBITDA by 1-3%.
  • On the back of stronger earnings and rolling forward our valuation to FY18, we raised our TP to S$1.45 from S$1.35. Our TP implies a EV/EBITDA multiple of 13x which is close to its average EV/EBITDA multiple.

No major updates on Sentosa redevelopment but Japan casino framework moving forward

  • During the 2Q17 results call, due to the confidential discussions the company is having with the Singapore government, it was unable to provide any updates on its plans to its Resorts World Sentosa (RWS) property.
  • On Japan, GENS noted that the Japanese government is the process of taking public consultations which will be incorporated into a second bill. Furthermore, based on the current framework, there are no restrictions on GENS bidding to build an integrated resort at more than one site. Various cities are also gearing up for the potential bid for an integrated resort in their city.


Where we differ – Sustainable earnings recovery. 

  • Consensus has a TP that is close to GENS’ current share price given concerns about the sustainability of its earnings recovery. We differ in this as GENS has been able to grow its earnings despite the still soft VIP rolling chip and mass business volumes, led by the successful execution of its cost reduction initiatives as well as lowering bad debts on implementation of a more selective and conservative credit policy last year. 
  • This structurally lower cost base provides a strong platform when volumes eventually bounce. To that end, management guided that while it is still cautious, it is seeking to grow its business and will look to extend credit to VIP customers selectively.


Still trading at depressed valuations. 

  • Despite the recent rally, GENS still offers compelling value, as it trades at 10.0x FY18F EV/EBITDA, which is in line with –1SD of its mean of 10.0x. 
  • 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

  • After rolling forward our valuation to FY18, we raised our DCF-based TP to S$1.45 from S$1.35. Our valuation excludes any Japan casino.
  • With 23% upside to our revised TP of S$1.45, we reiterate our BUY call. We continue to like GENS despite the share price rallying by over 40% since we upgraded our recommendation to BUY in August last year. 
  • We believe with an earnings recovery this year and management now having a greater focus on growing its business in Singapore, GENS should trade at its average EV/EBITDA multiple of c.13x. 
  • The reasons for GENS trading at a discount to its average multiple over the past 18 months, namely rising bad debts and falling earnings are no longer present.


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.




Mervin SONG CFA DBS Vickers | http://www.dbsvickers.com/ 2017-08-03
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 1.45 Up 1.350



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