Genting Singapore (GENS SP) - Maybank Kim Eng 2017-08-03: Higher For Longer

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GENTING SINGAPORE PLC G13.SI

Genting Singapore (GENS SP) - Higher For Longer

Estimation’s raised on 2Q beat; BUY with Target Price +8% to SGD1.35 

• Genting Singapore's 2Q17 earnings were 15% above our estimate. Therefore, we raised our FY17-19 EBITDA estimates by 7-8%. 
• More importantly, operating conditions have improved markedly. 2Q17 industry VIP volume rose YoY for the first time in 14 quarters, while 2Q17 mass market GGR was flat YoY after four quarters of YoY declines. 
• Rolling forward our valuation to end-FY18E and ascribing an unchanged 12M forward EV/EBITDA of 12x (eight year mean), we lifted our Target Price from SGD1.25 to SGD1.35. BUY.

Handily outperformed our expectation 

• GENS' 2Q17 core net profit of SGD159.8m brought 1H17 core net profit to SGD311.8m, which was above our expectation at 58% of our full-year estimate. The outperformance was largely due to:
  1. higher-than-expected 1H17 VIP hold rate of 3.0% (forecast: 2.85%);
  2. lower-than-expected 1H17 direct VIP rebate rate of 1.4% (forecast: 1.5%); and
  3. lower-than-expected 1H17 trade receivables impairments of SGD29.7m (only 35% of our full-year estimate).

Operating conditions improved markedly 

• In 2Q17, RWS ceded 1ppt of VIP volume share QoQ to 34% but offered ~150bps less in direct VIP rebates QoQ to 1.3% and gained 2ppts of mass market GGR QoQ to 40%. Despite the former, the latter two are more meaningful to earnings as they expand margins.
• Positively, 2Q17 industry VIP volume grew YoY for the first time since 3Q13 thanks to the recovery in Chinese VIP volumes. 2
• Q17 industry mass market GGR was flat YoY after four quarters of YoY declines thanks to recovering consumer sentiment in Singapore.

FY17-19 EBITDA estimates revised up by 7-8% 

• Based on the above factors, we:
  1. cut our VIP volume assumption; but 
  2. lowered our direct VIP rebate rate assumption;
  3. raised our mass market GGR assumption; and
  4. cut our trade receivables impairments assumption. 
• The net impact of the aforementioned is to lift our FY17/18/19 EBITDA estimates by 8%/7%/7% and FY17/18/19 core net profit estimates by 20%/28%/26%. 
• All in all, our long-term EBITDA estimate range is lifted from SGD1.0b-SGD1.1b to SGD1.1b-SGD1.2b.

Swing Factors

Upside

• VIP hold rate - If VIP hold rate is above theoretical levels, it can positively influence earnings.
• Rise in local mass market base. Singaporeans account for the majority of mass market gamblers and are more resilient.
• Tilt towards mass market away from VIP will expand margins due to less commissions and rebates.

Downside

• VIP hold rate – if VIP hold rate is below theoretical levels, it can negatively influence earnings.
• Bad debts –Chinese account for the majority of VIPs but gambling debts are not enforceable in China.
• Regional expansion –new jurisdictions often require high capex commitments without guaranteeing returns.

Yin Shao Yang Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2017-08-03

Maybank Kim Eng SGX Stock Analyst Report BUY Maintain BUY 1.35 Up 1.250