Genting Singapore - UOB Kay Hian 2016-05-16: 1Q16 A Good Start To The Year

Genting Singapore - UOB Kay Hian 2016-05-16: 1Q16 A Good Start To The Year GENTING SINGAPORE PLC G13.SI 

Genting Singapore (GENS SP) - 1Q16: A Good Start To The Year 

  • VIP RCV recorded the first time qoq improvement since 2Q14 and 1Q16’s total GGR market share of 46% was at its highest since 4Q14. 
  • While 1Q16 was unexpectedly hit by high provisions again, we note this is a legacy and non-cash flow related issue. 
  • We share management’s confidence in how provisions would fall significantly in 2H16. GENS is eyeing better capital management. 
  • Maintain BUY. Target price: S$0.97.



RESULTS


Pre-provision EBITDA within expectation. 

  • Genting Singapore’s (GENS) 1Q15 adjusted EBITDA before provisions was in line with our expectation at S$285m (+26% qoq and -7% yoy), although headline adjusted EBITDA of S$193m (6.2% qoq, -15.6% yoy) made up only 19% and 21% of our and consensus 2016 forecasts, respectively.

Qoq improvement in business volume and GGR. 

  • Unsurprisingly, GENS’ VIP rolling chip volume (RCV) rose by about 3% qoq (yoy: -29%) in 1Q16, after it dropped to S$8.7b in 4Q15, the lowest level since the opening of Resorts World Sentosa (RWS) in 2010. 
  • Aided by the better luck factor (win rate: 1Q16: 2.9%, 4Q15: 2.1% and 1Q15: 2.5%), we estimate that GENS’ VIP gross gaming revenue (GGR) improved by about 40% qoq (- 17% yoy). 
  • For the mass market segment, we estimate that GENS’ GGR improved by high single-digits qoq and low single-digits yoy.

Volume and GGR market share gain... 

  • Overall, GENS’ total GGR market share in the duopoly casino industry was about 46% in 1Q16, the highest since 4Q14.

... reflects successfully executed strategy. 

  • Management projected optimism (a discernable improvement in sentiment vs past conference calls) and highlighted RWS’ successful reorganisation which grew visitor arrivals and mass market gaming from different geographical markets. 
  • Management is also positive on Singapore’s tourist’s arrival trends, citing record visitation to Universal Studios in 1Q16.

Provisions surprisingly spiked. 

  • On a negative note, bad debt provisions surprisingly increased to $S92m in 1Q16, after it came off to S$45m in 4Q15. Nevertheless, we notethat the provision, (a non-cash item) is attributed to legacy receivables. 
  • GENS’ receivables have come down to a more manageable level in 1Q16, suggesting GENS’ effort of prudently right-sizing its credit extension to credit-worthy VIP players in 2H15 started to see effect.



STOCK IMPACT 


 Tightening credit term; provisions to be significantly lower in 2H16. 

  • Management shared that GENS has tightened its credit term (from 90 days to 30 days) since Mar 16. This, coupled with a relatively more credit-worthy client profile, points to significantly lower provisions in 2H16, although the company acknowledges that recovery is still ongoing. 
  • We reckon that the current level of VIP volumes should incur a quarterly run rate of S$30- 40m, once the legacy issues blow over. 

 Tunes down on greenfield opportunities. 

  • Unlike the previous optimistic view on Japan’s legalisation of the gaming industry, the company acknowledged the poor visibility of the legalisation timeline. 
  • Separately, GENS has explored new potential markets in Asia, but reached a no-go decision due to political risks. 

 Jeju project update. 

  • The total capex for GENS’ Jeju JV project was revised down to US$2b (from original US$2.2b). 
  • Meanwhile, there has been a positive buyer response towards the launch of the project’s residential properties, which account for < US$1b of the total US$2b capex. 
  • The estimated 2016 capex for the Jeju project would be US$500m, with GENS’ portion of US$250m to be injected into the JV. 
  • The Jeju resort is slated for progressive opening from end-17 onwards. 

 To redeem perpetual securities, should the Japan opportunity does not materialise. 

  • Management shared that GENS plans to redeem its perpetual securities (can only be redeemed earliest by Sept 17) should there be no requirements for the company to use the cash. To recap, GENS issued S$2.3b (5.125% rate) in perpetual securities in 2012 with the original intention to enhance its balance sheet for Japanese new casino bidding. The redemption would enhance GENS’ cash flow, given that it currently pays S$118m in interest to its perpetual securities holders p.a.

 Strong cash position to provide room for capital management. 

  • While GENS commendably declared a dividend of 1.5 S cents for 2015 (2014: S$1.0 cent), much more could be done given its highly cash generative business and high net cash position of S$1.2b (after treating $S2.3b perpetual securities as debt). 


EARNINGS REVISION 

  • We trimmed our 2016 EBITDA forecast by 5%, to reflect 1Q16’s high provisions. 


VALUATION/RECOMMENDATION 

  • Maintain BUY with an unchanged target price of S$0.97, which implies 2017 EV/EBITDA of 10.6x (our calculation treats GENS’ perpetual securities as debt). 
  • 2017 serves as a better valuation yardstick given the absence of legacy provisions.




Vincent Khoo CFA UOB Kay Hian | Yeoh Bit Kun UOB Kay Hian | http://research.uobkayhian.com/ 2016-05-16
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 0.97 Same 0.97


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