Genting Singapore - DBS Research 2016-11-04: Turn around in sight

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GENTING SINGAPORE PLC G13.SI

Genting Singapore - Turn around in sight

• 3Q16 adjusted EBITDA up 12% y-o-y, the first increase in eight quarters.
• 1.5 Scts interim dividend a pleasant surprise.
• Recovery in FY17 on the back of a pickup in VIP volumes, normalizing VIP win rate and bad debts easing.

Cheap valuation at below -2 SD EV/EBITDA. 

• We maintain our BUY call on Genting Singapore (GENS) with a TP of S$0.91. 
• With signs of stabilisation as demonstrated by the first y-o-y increase in GENS’ adjusted EBITDA in eight quarters, we believe we are closing in on a recovery in earnings in FY17. 
• In addition, GENS offers compelling value at current levels as it trades at 8.2x FY17F EV/EBITDA, which is below –2 SD of its mean of 9.0x and its Macau peers which trade at c.12.9x. 
• Furthermore, it offers an attractive 3.9% dividend yield after declaring its first interim dividend.

BUY ahead of earnings recovery in FY17. 

• Following two tough years, we believe now is the opportune time to buy into a highly cash generative business in a two player oligopoly. 
• We believe 2017 will mark a recovery in earnings (22% jump in adjusted EBITDA) due to 
  1. recovery in VIP volumes as volumes bottom out this year (we have penciled in a 3% improvement), 
  2. normalising VIP win rate to the 2.85% theoretical rate from c.2.6% in 9M16, and 
  3. easing of bad debts given GENS’ more selective and conservative credit policy over the past year.

40% net cash backing affords higher dividends and buybacks.

• With net cash of c.S$3.7bn representing c.40% of GENS current market capitalisation and its strong cashflow generation, we had anticipated GENS may consider capital management initiatives such as higher dividends. This was duly delivered with its first interim dividend of 1.5 Scts. 
• We are not ruling out share buybacks given GENS depressed share price. In our view, the strong balance sheet also provides GENS with financial muscle to invest in a Japanese integrated resort should legislation be passed to legalise casinos in November. Either of these would be catalysts to re-rate the stock.

Valuation

• With GENS 3Q16 result in line with expectations, we maintain our DCF-based TP of S$0.91. 
• Our TP price implies a FY17F EV/EBITDA of 10.2x, close to -1.5 SD of 10.0x. Our valuation does not include GENS’ Jeju project given limited details.

Key Risks to Our View

• Decline in VIP and mass businesses. The key risk to our positive view is a slower than expected recovery or decline in GENS’ VIP and mass divisions.

Mervin SONG CFA DBS Vickers | http://www.dbsvickers.com/ 2016-11-04

DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 0.910 Same 0.910