Genting Singapore - UOB Kay Hian 2015-09-25: Value Appeal

Genting Singapore Analyst Report @ SG ShareInvestor GENTING SINGAPORE PLC G13.SI 

Genting Singapore (GENS SP) - Value Appeal 

  • We recently hosted a luncheon with Genting Singapore’s management.  
  • We expect rerating catalysts to slowly emerge, including the potential casino legalisation in Japan by 4Q15 and improving bottom-line trends. 
  • GENS' regionally low EV/EBITDA continues to appeal to value investors. 
  • Maintain BUY with a target price of S$1.01. 

*amendment issued on 28-Sep-2015.


WHAT’S NEW 

  • We recently hosted Genting Singapore’s (GENS) CFO, Ms. Lee Shi Ruh and Senior Vice President - Corporate Development, Mr David Hoon, at a luncheon in Singapore. 
  • Key Issues discussed were GENS' investment exposure to other casino stocks, the long period of poor win percentages, impact of the strong Singapore currency on visitation by ASEAN patrons, progress updates on its Korean casino venture and Japan casino legalisation legislative process. Funds remained neutral to GENS. Although there was more assurance that 2Q15's net loss would not recur, investors noted the lack of disclosure of its investments and capital management initiatives. 


STOCK IMPACT 

  • We continue to believe that despite the regional challenges which dampen visitation to Resorts World Sentosa (RWS), core EBITDA has bottomed out in 2Q15, in expectation of lower bad debt provision and improving win percentage, and also note the exceptionally low contribution from the VIP segment (17% to 2Q15 net GGR). 

• Neighbouring countries’ weak local currencies is a near-term challenge… 

  • The company acknowledged that the weak ASEAN currencies against the Singapore dollar could be a temporary setback to GENS as it could dampen patronage or spending/head. In particular, it noted the Malaysian ringgit’s exceptional weakness which may dampen visitation from Johorians which made up a significant portion of mass market visitors. That said, we understand that hotel visitations from countries which suffered from weak currencies have not significantly dropped, and there's encouraging spillover from the well occupied (90%) Jurong budget hotel, with the majority of the hotel guests using the free shuttle bus service to RWS. 

• … but expecting bad debt provision to decline… 

  • As RWS has scaled down its credit facilities to VIPs and expedited collection process (particularly on mainland China VIPs) over the past two quarters, bad debt provision is expected to decrease further in the 2H15. 2Q15’s provision has dropped to S$57m, from 1Q15’s S$76m and 4Q14’s S$82m. We expect provisions to eventually come down to < S$40m/quarter, which is more reflective of its current (substantially lower) VIP GGR and receivables. 

• … and hopeful for better win rate. 

  • GENS’ win rate was well below the theoretical rate as well as rival Marina Bay Sands’ in the past five quarters. Management is hopeful for trend reversal as over a longer term measure (ie since the respective casino openings in 2010), GENS’ win rates stands at 2.85% (we also take note that since RWS’ opening, win percentage averaged around the theoretical 2.85% rate). 

• Investment in derivative financial instrument still lacking transparency. 

  • GENS highlighted that 2Q15 was more of a ‘perfect storm’ wherein the bottom-line suffered from both investment and forex losses, whereas the company recognised forex gains in the previous quarters. Recall that GENS recorded derivative financial instruments losses of S$95m in 2Q15, which is related to equity-linked investments in other listed gaming/leisure-related companies. During the meeting, management highlighted that the situation should improve in 2H15 as the open position has been reduced to S$701m (1Q15: S$1.2b, 4Q14: S$1.4b). 
  • Just like during the earlier results briefing, no details of the financial instrument were provided or whether GENS would continue to pare down its investments in these structured products and whether it will invest more in similar investments in the future (although we note management’s earlier highlighted that these investments could become strategic, and that GENS continues to benefit from a cumulative net positive gain since such investments were made a few years ago). 

• Still hopeful for gaming legalisation in Japan. 

  • Management remains optimistic on Japan’s prospects of legalising casinos by 4Q15, expecting the gaming bill to be discussed soon, after the recent approval on the country’s security bill. 

• Jeju Island’s resort to start operation in 2017. 

  • On the JV in Korea’s Jeju Island, about US$300m of the total investment of US$1.9b will be spent in the near future with the start of construction. Operations are expected to start in 2017. Currently, there are eight small casino operators on the island, with some merely operating 20 gaming tables . 

• Not expecting significant capital management; saving cash for more share buybacks. 

  • Despite its strong cash pile and free cash flow, we are not putting high hopes for a significantly better earnings payout. GENS continues to grow its war chest in pursuit of new greenfield opportunities, and its strong financial strength would be very handy should the opportunity arise for it to bid for Japan’s casino concession. However, GENS has actively bought back 50m shares in Aug 15 (price range: S$0.79-S$0.81). 


EARNINGS REVISION/RISK 

  • None. We continue to expect modest EBITDA recovery in 2H15. We believe that the Singapore gaming market is forming its low base in 2015, and GENS should deliver moderate EBITDA growth in 2016, driven by low single-digit mass market GGR growth and 5% rise in rolling chip volume. 


VALUATION/RECOMMENDATION 


• Value appeal. 

  • Having plunged 32% ytd, and 19% since 2Q15’s profit warning announcement (related to the losses in derivative financial instrument), GENS now trades at only 8.0x 2016 EV/EBITDA (after adjusting for GENS’ perpetual securities. Otherwise, it should be 6.0x 2016 EV/EBITDA), one of the lowest among the large-scale casino operators. 

• Maintain BUY 

  • with target price of S$1.01, which implies 2015 EV/EBITDA of 12x and adjustment for GENS’ perpetual securities. 

SHARE PRICE CATALYST 

  • Better-than-expected gaming volume and win rates, Japan legalising casinos, liberalisation of Korean gaming industry.


Vincent Khoo CFA UOB Kay Hian | Yeoh Bit Kun UOB Kay Hian | http://research.uobkayhian.com/ 2015-09-25
UOB Kay Hian Analyst Report BUY Maintain BUY 1.01 Same 1.01


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