Genting Singapore - UOB Kay Hian 2016-08-22: Less Pumped Up By Upside

GENTING SINGAPORE PLC G13.SI

Genting Singapore (GENS SP) - Less Pumped Up By Upside

While GENS’ share price should still recover in 2H16 as provisions shrink and EBITDA rises, the stock’s upside is limited by a soft mass market GGR trend.
Based on the recent yoy mass market GGR drop at both casinos in 2Q16 despite the rising number of tourist arrivals to Singapore, we now assume that the contraction could be linked to the spillover effect of the O&G industry’s contraction. This suggests a slow recovery.

While both Singapore casino operators have been dogged by the soft VIP market, linked to China’s GDP slowdown and persistent graft crackdown in the country since 2014, mass market GGR has been on a steady climb until 2Q16 – plodding yoy quarterly growth from 2Q14 to 1Q16 (except 4Q15). This changed in 2Q16, when both Resorts World Sentosa (RWS) and Marina Bay Sands (MBS) surprisingly recorded yoy contractions. Consequently, Singapore’s mass market GGR (tables and slots) dropped by an estimated 7.6% yoy, the most severe quantum drop since the opening of the dual casinos in 2010.
Our revised assessment of the mass market trend is consistent with industry observers.

We attribute the mass market slowdown to the meltdown in the oil and gas (O&G) industry which saw massive manpower cuts and financial restructuring. The O&G industry contributed about 5% to Singapore’s 2015 GDP and consultants estimated that 15,000 jobs related to the O&G industry in Singapore may have been lost in the past year.
Notably in the past, professionals in the O&G industry are known for their lucrative pay, and quite a few O&G related individuals ranked among Singapore’s wealthiest individuals. Hence, it is perceived that up until recently, gamers from the O&G industry disproportionately featured higher spending power and accounted for the premium mass segment.
The same analysis also applies to the O&G professionals in Malaysia, with Malaysia being a key market for Singapore’s casinos.
Hence, in conclusion, Singapore’s soft mass market GGR could persist in tandem with the prolonged stress in the O&G industry.

Singapore’s tourist arrivals rose 11% yoy in 2Q16, led by mainland China’s tourists (+65%), while Southeast Asian arrivals rose 4% (all SEA countries saw improvements except Malaysia which eased by 3%).
The muted impact on gaming revenues suggests these tourists are low-yielding players.

We expect GENS’ 2H16 EBITDA to rise 16% hoh to S$362m, as provisions ease (as legacy receivables taper off) and luck factor normalises.
We note that 2Q16 provisions have already dropped by S$39m qoq and S$3m yoy to S$54m, and we reckon that a normalised quarterly provision of S$30m would be more representative of RWS’ current credit extension practice to VIP gamers (high single-digit percentage of receivables).
Management guided that the old receivables prior to 2015 have either been written off or collected, and outstanding receivables are credit extension in the past 18 months. Management expects 3Q16’s provision to be around current levels as GENS’ receivables have come down to a more manageable level in 2Q16.

We expect a cleaner slate in 2H16, given lower provisions as well as the additional severance costs in 3Q16 (one-off impact from cost rationalisation initiatives which include headcount rationalization exercise) should be offset by part of the S$30m annual cost savings.

We are cautious on the nearterm outlook for VIP segment given softened gaming volume from high-end customers.
Nevertheless, we agree with the company’s view that the current gaming volume is sustainable.

We trim our 2016 and 2017 EBITDA by 4% and 2% respectively after revising our mass market GGR assumption to -5% (from -3%) for 2016, plus the incorporation of some minor adjustments.

Maintain BUY with lower TP of S$0.84 (previously S$0.88), following our earnings adjustment which implies a target 11x blended 2016-17 EV/EBITDA (previously we valued GENS based on prospective normalised run rate of S$850m).
GENS’ strong net cash position (S$1b after minus perpetual bonds) provides room for better capital management, eg retiring perpetual securities in 2017.
Also, GENS is trading at a regionally undemanding 8.8x 2017F EV/EBITDA (treats perpetual bonds as debt).

Vincent Khoo CFA UOB Kay Hian | Yeoh Bit Kun UOB Kay Hian | http://research.uobkayhian.com/ 2016-08-22

UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 0.840 Down 0.880