Genting Singapore - CIMB Research 2017-02-23: On a steady course for a re-rating

Genting Singapore - CIMB Research 2017-02-23: On a steady course for a re-rating GENTING SINGAPORE PLC G13.SI

Genting Singapore - On a steady course for a re-rating

  • 4Q16 adj. EBITDA was in line with our expectations, thanks to ongoing cost efficiency initiatives. Adj. EBITDA margin grew to 41.9% (vs. 40.2% in 3Q16).
  • FY16 core net profit formed 104%/118% of our/consensus full-year forecasts, broadly in line with our expectations.
  • Surprise final DPS of 1.5Scts brings FY16 DPS to 3.0Scts.
  • Upgrade to Add and target price raised to S$1.11, based on 9x FY18F EV/EBITDA.

Staying steady with cost efficiency initiatives 

  • 4Q16 adj. EBITDA of S$233.7m (flat qoq, + 28.9% yoy) was a testament to GENS’s cost efficiency initiatives. 
  • 4Q16’s gaming and non-gaming revenue fell 2%/9%, likely on a lower VIP win rate of 2.8% (3Q16: 3.3%) and a lower mass GGR as Malaysian spend/visitor numbers fell due to S$/RM forex. 
  • However, the EBITDA margin grew to 41.9% (3Q16: 40.2%) due to a 17% qoq drop in expenses driven by lower impairment of loss in trade receivables (-23% qoq) and administrative costs (-22%).

VIP business fully calibrated; premium mass remains a focus 

  • GENS believes it has restructured the VIP business, having successfully reduced its bad debts and account receivables levels. 
  • In 2017, management said it will focus on growing VIP revenues instead of collections. It will also continue to pursue the premium mass segment by reinvesting in the integrated resort. 
  • The Maritime Experiential Museum is still scheduled to undergo complete renovation and will re-open with all new content in end-2017.

All eyes on Japan 

  • GENS is determined to gain a spot in Japan and is fully committed to a strong bid when the time comes (by 2018). 
  • Eyes are on Osaka but GENS is not ruling out participating in Yokohama should tender bids emerge. GENS believes 
    1. its track record as a successful integrated resorts player in Singapore, and 
    2. its hefty cash pile of c.S$5.0m will make it a strong contender. 
  • Management said that it expected investment for the Japan casino to range at US$7bn-12bn, and believe project IRRs could be 10-15%.

Higher DPS going forward 

  • GENS surprised with a 1.5Scts DPS in 4Q16, bringing the full-year DPS to 3.0Scts. This represents an all-time high payout ratio of 135% on FY16 core EPS and trumps the historical DPS of 1-2Scts for FY14-15. 
  • Management has guided for 3Scts DPS for the coming years to reward shareholders.

Trading below historical 5-year EV/EBITDA mean 

  • We estimate the stock currently trades at an FY18F EV/EBITDA of c.7x (excluding perpetuals), below its historical average 5-year mean of 11.5x. 
  • We believe the stock should trade up to at least the -1 s.d. level of c.9x given EBITDA margins are recovering to levels in FY14. 
  • We also note that the stock traded higher in FY14 during the last time Japan was tabling the casino bill.

Upgrade to Add from Hold 

  • We lift our FY17-18 EPS estimates by 12-16%, largely as we expect costs to come off.
  • We introduce FY19F forecasts. With our transfer of coverage, we also switch from a DCF valuation to EV/EBITDA as we believe that this better reflects GENS’s cash generative business and captures its re-rating closer to the bidding for the casino in Japan. At 9x FY18F EV/EBITDA (-1 s.d. from 5-year mean), our target price is S$1.11.
  • Downside risks include lower-than-expected EBITDA margins and failure in Japan.

Cezzane SEE CIMB Research | LIM Siew Khee CIMB Research | 2017-02-23
CIMB Research SGX Stock Analyst Report ADD Upgrade HOLD 1.11 Up 0.930