Genting Singapore - UOB Kay Hian 2015-11-13: 3Q15 ~ A Game Of Endurance

Genting Singapore - UOB Kay Hian 2015-11-13: 3Q15 ~ A Game Of Endurance GENTING SINGAPORE PLC G13.SI 

Genting Singapore (GENS SP) - 3Q15: A Game Of Endurance 

  • GENS surprised on the downside again with 3Q15 adjusted EBITDA falling short of our expectation by 15%. 
  • The surprise this time was a surge in impairment of receivables. 
  • GENS’ results continue to diverge from rival Marina Bay Sand’s good fortunes. Nevertheless, most of the bad news have been priced in. 
  • Notwithstanding a knee-jerk reaction, patient investors should expect sharply lower impairment by 2H16, and perhaps better dividends. 
  • Maintain BUY but lower target price to S$0.97. 


RESULTS 


 Under-achieving again. 

  • Genting Singapore’s (GENS) 3Q15 core adjusted EBITDA of S$209m (+8.0% qoq, -17.6% yoy) was 15% below our forecast although core EBITDA improved qoq from a low 2Q15 EBITDA. 
  • 9M15 core adjusted EBITDA was S$631m, or only 66% of our and consensus 2015 forecasts. 

 VIP: Weak rolling chip volume although luck factor turned better. 

  • For the VIP segment, GENS’ 3Q15 rolling chip volume disappointingly fell about 50% yoy and 20% qoq, a sharp contrast to Marina Bay Sand’s (MBS) strong recovery (+38.7% yoy, +24.6% qoq). 
  • A small consolation, GENS achieved a win rate close to the theoretical win rate of 2.85% in 3Q15 after four consecutive quarters of poor luck factor. 

 Impairment soared again. 

  • GENS’ 3Q15 receivables impairment surged to a record quarterly high of $92m (2Q15: S$57m, 3Q14: S$39m) after easing in the last two quarters. 
  • While this appeared counter-intuitive against falling receivables at S$773 as at 3Q15 (2Q15: S$885m, 3Q14: S$1,164m) and a much tighter credit policy since 2H15, management explained that there was still a sizeable amount of aged receivables in its books, suggesting that elevated impairment levels could persist through 1H16. These impairments relate mostly to mainland Chinese VIP gamers, while we reckon the impairment needed for Asean VIP clients remained relatively stable and low. 

 Mass-market segment remained resilient. 

  • With a 40% mass-market GGR market share, we estimate GENS’ mass-market GGR increased 2% yoy. This performance is considerably encouraging, given that neighbouring Asean currencies were weaker against the Singapore dollar during the quarter. 


STOCK IMPACT 


 Looking at the bright side

  • Looking at the bright side, gaming revenues have modestly turned around qoq in 3Q15 and pre-impairment EBITDA has recovered significantly by 20% qoq. Note that impairments are lagging indicators, and EBITDA should theoretically improve significantly when impairment charges eventually become more aligned to the current credit extension practice. We estimate a sustainable annual EBITDA run rate of S$1.1b from 2H16 onwards when impairment charges ‘normalise’. 

 Exploring the possibility of higher dividend; cash flows remained strong. 

  • Backed by net cash of $2.9b (without subtracting perpetual bonds) and poorer near-term visibility of engaging in sizeable greenfield opportunities, management would explore more seriously to improve its current token dividend policy. 
  • We note that despite the last two quarters’ of exceptionally low net profit, due to non cash flow losses, GENS’s net cash has consistently risen qoq, by S$298m in 2Q15 and S$265m in 3Q15. 

 Provisions to be significantly lower in 2H16. 

  • Management expects bad-debt provisions to be significantly lower in 2H16 as it has right-sized its credit extension to mainland Chinese VIP gamers, while maintaining its credit policy for Asean VIP customers. 
  • Unlike rival Las Vegas Sands which also operates in Macau, GENS has relatively limited capability in reading the creditworthiness of mainland Chinese VIP players. 

 Reduced exposure to financial derivatives. 

  • GENS recorded a lower S$65m loss on derivative financial instruments in 3Q15 (2Q15: S$95m loss), which was more than offset by a S$113m forex gain. 
  • Positively, it has significantly reduced its open position (3Q15: S$142m, 2Q15: S$702m, 1Q15: S$1,179m) as the unspecified derivative contracts expired. Nevertheless, GENS intends to keep its current positions. 

 Remains optimistic on prospects of legalising casinos in Japan but timeline unclear for now. 

  • While management remains sanguine, the debate and passing of the proposed casino bill would not materialise at end-15 as management had hoped for. Meanwhile, GENS targets end-17 soft opening for Jeju integrated resort. 
  • Soil works in Resorts World Jeju are almost completed as scheduled. GENS had recently obtained the construction permit and targets to commence building works by early-16. 


EARNINGS REVISION/RISK 


  • We reduce our 2015-17 EBITDA forecasts by 7%, 13% and 12% respectively. 


VALUATION/RECOMMENDATION 


 Maintain BUY 

  • Maintain BUY with a lower target price of S$0.97, which implies 11x 2016F EV/EBITDA (we treat GENS’ perpetual securities as debt). 
  • While we have rolled forward our target price to incorporate 2016 earnings, we also lower our EV/EBITDA multiple as our previous higher multiple (12x 2015F EV/EBITDA) to factor in a significant earnings recovery in 2016. 


SHARE PRICE CATALYST 

  • Better-than-expected gaming volume and win rates, Japan legalizing the casino business, and liberalisation of the gaming industry in South Korea.



Vincent Khoo CFA UOB Kay Hian | Yeoh Bit Kun UOB Kay Hian | http://research.uobkayhian.com/ 2015-11-13
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 0.97 Down 1.01

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