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.

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%).

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.

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%.

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.

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.

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 | http://research.itradecimb.com/ 2017-02-23

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