Genting Singapore - CIMB Research 2017-01-11: Take money off the table

Genting Singapore - CIMB Research 2017-01-11: Take money off the table GENTING SINGAPORE PLC G13.SI

Genting Singapore - Take money off the table

  • Genting Singapore (GENS) has sold its stake in RWJ for US$411m (S$596m), resulting in a S$96m gain.
  • The sale is intended to beef up its balance sheet for a potential casino bid in Japan.
  • While expansion into Japan could provide positive newsflow, we think the benefits will take time to be recognised. Meanwhile, GENS could incur startup costs first.
  • We see little margin expansion at RWS as most cost savings have been recognised.
  • We downgrade GENS from Add to Hold. We switch from an SOP valuation to DCF following the disposal of RWJ. Our TP rises to S$0.93 (WACC: 7.6%, g: 1.5%).

Completed disposal of RWJ for S$96.3m gain 

  • GENS disposed of its 50% stake in Resorts World Jeju (RWJ) for a consideration of S$596.3m, and will record a S$96.3m gain on the sale in 1Q17. 
  • We remove investment assumptions and JV contributions that we had previously built in for RWJ, and factor in the gain. Our FY17-18F core EPS falls 15-17% as a result, but our DCF-based target price rises to S$0.93 with the higher cash balance from sale proceeds.

Exit from RWJ to focus on Japan bid 

  • We are positive on GENS’s exit from RWJ as: 
    1. Recent restrictions on Chinese nationals’ outbound travel to South Korea present some challenges for RWJ. Chinese tourists were its target audience due to its location being 1-2 hours flight away from major cities in northeast China. 
    2. GENS monetised its investment in RWJ without having to face the operational risks. 
    3. We estimate GENS now has a net cash balance of S$4.2bn which will strengthen its position against rivals in a casino bid in Japan.

Japan will take time, startup costs will hit first 

  • We think Japan is likely to be a medium term story as: 
    1. a bill detailing casino laws will be debated in parliament in 2017, 
    2. several cities, including Tokyo, Sapporo, Osaka and Yokohama will submit proposals to host the integrated resort (IR), and 
    3. the winning cities will then choose companies to build and manage the IR. 
  • Even if GENS made a successful bid, we think it could incur startup costs prior to the IR opening, which we believe would be in 2022-23F at the earliest.

Unlikely to redeem perpetuals until it can obtain project financing 

  • GENS has S$2.3bn in perpetual bond issuance bearing 5.125% interest, and is callable on 12 Sep 2017 or subject to a step-up to 6.125% on 12 Sep 2022. 
  • We think GENS is unlikely to redeem it at the first callable date given that it will undermine its balance sheet strength prior to a successful bid in Japan. Rather, we think it could turn to project financing if it secures a bid, and likely at a lower rate than the 5.125% it is now paying.

Little upside at RWS; cost savings have mostly been recognised 

  • 3Q16 was a stellar quarter at Resorts World Sentosa (RWS), registering adjusted EBITDA margin of 40.2% – the highest in nine quarters. This was largely due to cost rationalisation efforts in the VIP business, which includes scaling down manpower, rationalising processes and lowering utility bills. 
  • We think the bulk of cost savings have been recognised in 3Q16, with little room to cut costs further. Bad debt charges have also reached a healthy level of S$50m, leaving little room for improvement, in our view.

Downgrade from Add to Hold 

  • GENS’ share price has done well since Nov 2016 driven by record EBITDA margins, its commitment to paying higher dividends and the passing of the casino bill in Japan. 
  • We switch from an SOP valuation to DCF following the sale of its stake in RWJ. Our target price rises slightly to S$0.93 (WACC: 7.6%, g: 1.5%) to factor in the gain.
  • Upside/downside risks include higher/lower GGR at RWS and dividends.

Jessalynn CHEN CIMB Research | http://research.itradecimb.com/ 2017-01-11
CIMB Research SGX Stock Analyst Report HOLD Downgrade ADD 0.93 Up 0.890