Genting Singapore - CIMB Research 2016-11-03: Superb margins, surprise dividend

Genting Singapore - CIMB Research 2016-11-03: Superb margins, surprise dividend GENTING SINGAPORE PLC G13.SI

Genting Singapore - Superb margins, surprise dividend

  • 3Q adj. EBITDA exceeded expectations on the back of lower operating expenses as cost efficiency initiatives paid off. Adj. EBITDA margin was the highest in 9 quarters.
  • 9M core net profit formed 75%/82% of our/consensus full-year forecasts.
  • A surprise interim DPS of 1.5 Scts was declared (101% payout of 9M16 core EPS).
  • Maintain Add, with an unchanged SOP-based target price of S$0.89.

Outstanding results as cost efficiency led to margin improvement 

  • GENS’s 3Q adjusted EBITDA of S$233.6m (+101% qoq, +12% yoy) was an outstanding earnings beat in a challenging gaming environment. 
  • Net gaming revenue rose 23% qoq on higher rolling win rate, and non-gaming revenue did well (+17% qoq) as visitation to its attractions grew and hotel occupancy remained high at 92%. But the highlight was the reduction in expenses (-6% qoq, -28% yoy), due to cost efficiency initiatives implemented in 2Q. 
  • Adjusted EBITDA margin of 40.2% was the highest in nine quarters.

Efforts to reduce reliance on VIP business paid off 

  • Rolling chip volume fell in the mid-teens % qoq as it continued to scale down its VIP business, partly offset by higher rolling win rate of 3.3% (2Q: 1.7%). Even on a holdnormalised basis, adj. EBITDA rose 12% qoq to S$215m, with lower VIP volume hardly making a dent amid relatively steady mass gaming volume (low-single-digit % fall qoq), cost rationalisation in the VIP segment, and lower bad debt charges (-6% qoq, -46% yoy). GENS guided for more cost savings and lower bad debt in the next two quarters.

Reinvesting in RWS to position for the premium mass segment 

  • In addition to the refurbishment of Hard Rock Hotel announced in 2Q, GENS plans to fully upgrade the Maritime Experiential Museum by end-2017. 
  • It has other property enhancement projects in the pipeline in 2017 to rebrand and reposition Resorts World Sentosa into a premium lifestyle destination and better target the premium mass market.
  • We think this could yield better returns and margins if successful, amid efforts to shift away from VIP to mass. Management previously guided for 2017 capex of c.S$100m.

Jeju stalled by a typhoon; turning more hopeful on Japan 

  • The soft opening of Resorts World Jeju was initially targeted for early Oct; however, construction of the integrated resort and sales of the residential units were delayed by a typhoon that resulted in flooding at the site. Damage is expected to be minimal with insurance coverage. 
  • Management is also turning more hopeful on the casino bill being passed in Japan during the upcoming parliament session in Nov; it will make a decision on whether to redeem its perpetuals in Oct 2017 based on the outcome in Japan.

Surprise interim DPS of 1.5 Scts and lower interest cost 

  • GENS surprised us by declaring an interim DPS of 1.5 Scts. This represents a 101% payout ratio of 9M16 core EPS. 
  • Historically, it has only paid out annual dividends in 4Q (FY15: 1.5 Scts). It is still in the process of finalising a formal dividend policy, but aims to still pay a final dividend in 4Q. GENS also repaid S$387.5m in bank borrowings in 3Q, which resulted in lower interest costs (-17% qoq, -32% yoy).

Maintain Add 

  • We raise FY16-18F EPS by 7-17% for lower expenses and bad debt charges, partially offset by lower gaming volume. 
  • Our Add rating and SOP-based target price of S$0.89 stay intact. 
  • We expect the positives in 3Q to flow through over the next few quarters as GENS sees further cost savings and bad debt charges sustaining at lower levels. 
  • Key risk to our view is large market share losses to competitor, MBS.

Jessalynn CHEN CIMB Research | 2016-11-03
CIMB Research SGX Stock Analyst Report ADD Maintain ADD 0.890 Same 0.890