Genting Singapore (GENS SP) - UOB Kay Hian 2017-11-07: 3Q17 Nice Convergence Of Positive Factors

Genting Singapore (GENS SP) - UOB Kay Hian 2017-11-07: 3Q17: Nice Convergence Of Positive Factors GENTING SINGAPORE PLC G13.SI

Genting Singapore (GENS SP) - 3Q17: Nice Convergence Of Positive Factors

  • GENS’ 3Q17 results beat expectations amid volume improvements in both the mass market and VIP segments, a better-than-theoretical win rate and bad debt recoveries.
  • The downtrend in VIP RCV finally reversed amid a more relaxed credit policy and the mass market also achieved decent GGR growth. 
  • We expect share price to react positively on the results but maintain HOLD on stellar ytd gains. 2018 could lack further impactful rerating catalysts. Target price: S$1.30. Entry price: S$1.15.



RESULTS


Above expectations. 

  • Genting Singapore (GENS) reported a 3Q17 core adjusted EBITDA of S$320m (+9% qoq, 37% yoy), bringing 9M17 EBITDA to S$896m, representing 83% and 80% of our and consensus full-year forecasts respectively. 
  • The better-than-expected results were due to a combination of strong growth in VIP rolling chip volume, better-than-theoretical win rate of 3.1%, surprising growth in mass gross gaming revenue (GGR) as well as a write-back of receivables. 
  • GENS’ EBITDA margin was impressive at 50.8% in 3Q17, a multi-year high, although we reckon we reckon that margin performance could modestly taper off as the quarter’s margin was partly boosted by good luck factor and a bad debt write-back (due to successful lawsuits). We estimate luck-adjusted EBITDA at around S$300m.

VIP: Improved RCV, finally! 

  • GENS’ VIP rolling chip volume (RCV) growth finally saw a turning point in 3Q17, after 12 consecutive quarters of yoy declines. Compared to a low base in 3Q16 (lowest level since RWS’ opening in 2010), we estimate RCV rebounded strongly by 36% yoy in 3Q17 (qoq: +21%). The strong volume growth was partly attributed to the company’s more relaxed credit policy. 
  • Interestingly, management highlighted that the RCV volume growth came from both new and existing customers, with the new customers originating from the ASEAN and China markets. Despite the strong RCV in 3Q17, we estimate that 9M17 RCV still dropped 4% yoy.

Mass market: GGR improved yoy. 

  • We expect mass market GGR to have grown decently in 3Q17, thanks to the regional expansion of the premium mass business and strong yoy growth in electronic gaming machines performance in terms of gaming volumes (RWS opened a new high limit slot room during the quarter).
  • All in all, GENS’ gaming revenue was up 11% yoy and 2% qoq in 3Q17. We estimate GENS’ total GGR market share stood at 38% (3Q16: 36%, 2Q17: 34%).

Significant write-back of bad debts, but impairments have probably bottomed.

  • GENS could have significantly benefited from bad debt write-backs, judging by the sharp S$68m qoq fall in receivables in 3Q17. 
  • While GENS’ impairment of receivables stayed low at S$14m in 3Q17 (2Q17: S$15m, 3Q16: S$50m), future quarters’ impairments would likely rise modestly, considering the general positive correlation (but with lagged impact) with improving RCV trends.


STOCK IMPACT


Relaxing VIP credit policy could further boost VIP volume. 

  • Despite the slightly loosened credit policy, the company believes that its policy remains risk adverse and there is room for further loosening of its credit policy without compromising balance sheet.

Working on a roadmap to “refresh” RWS properties. 

  • GENS is working on a roadmap to strengthen the lifestyle destination appeal of Resorts World Sentosa (RWS), which is currently in its 8th year of operations. No details have been revealed, but capex of up to S$1b could be allocated for this purpose.

3 S cents DPS likely to be maintained despite improved earnings. 

  • Despite the better earnings prospects in 2017, GENS would maintain last year’s 3.0 S cents DPS as it would need to reserve cash for expansion which includes reinvestment in Singapore properties as well as preparation for Japan’s Integrated Resort bidding. To recap, GENS had declared a 1.5 S cents DPS in 2Q17, implying an expected final DPS of 1.5 S cents.

Japan’s Implementation Bill likely to be tabled in summer. 

  • On the Japan greenfield opportunity, management views that the Implementation Bill is likely to be tabled in the summer of next year.


EARNINGS REVISION

  • We revise our EBITDA forecasts upward by 8-9% for 2017-19 to reflect 2017’s better win rate and as we fine-tune our RCV growth and mass market GGR growth assumptions for 2017-19.
  • However, we project flattish EBITDA growth in 2019, reflecting our assumptions of a theoretical win percentage (vs 2017’s lucky win percentage), modest slippage in patronage with Malaysia’s Genting Highland’s opening of 20th Century Fox theme park (the theme park is expected to lift visitorship to the highlands by 40% when fully rampedup in 2019, from 2016’s level).


VALUATION/RECOMMENDATION

  • Maintain HOLD on GENS with higher target price of S$1.30, following our earnings adjustment and roll forward our valuation to 2018. 
  • Our target price has imputed a 10 S cents Japan “option value” (assumption: 30% success rate, US$10b development cost with IRR 13% and 50% JV stake). 
  • Target price of S$1.30 implies EV/EBITDA of 11.2x in 2018. Entry price: S$1.15.




Vincent Khoo CFA UOB Kay Hian | Yeoh Bit Kun UOB Kay Hian | http://research.uobkayhian.com/ 2017-11-07
UOB Kay Hian SGX Stock Analyst Report HOLD Maintain HOLD 1.30 Up 1.150



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