Genting Singapore - DBS Research 2018-02-26: Still Holding The Winning Hand

Genting Singapore - DBS Vickers 2018-02-26: Still Holding The Winning Hand GENTING SINGAPORE PLC G13.SI

Genting Singapore - Still Holding The Winning Hand

  • Genting Singapore's 4Q17 adjusted EBITDA up 9% y-o-y to S$255m, in line with expectations.
  • Second consecutive quarterly y-o-y improvement in VIP rolling chip volumes offset by lower VIP win rate of 2.7%.
  • Sustained earnings recovery in 2018.



Rally not over. 

  • We maintain our BUY call on Genting Singapore (GENS) with a revised Target Price of S$1.49. While Genting Singapore’s share price has rallied by over 45% since our upgrade to BUY in August 2017, we believe the rally can continue.
  • Our view is underpinned by expected positive newsflow including the continued recovery in earnings, details of a more efficient capital structure, refresh of Resorts World Sentosa, and bid for a Japanese casino.


Where we differ – Deserves to trade at average EV/EBITDA multiple. 

  • While consensus has increased their Target Price over the past few months, the implied EV/EVITDA multiple remains below Genting Singapore’s average multiple of c.12x. We believe Genting Singapore deserves to trade at its average EV/EBITDA multiple given a sustained earnings recovery outlook. 
  • Furthermore, the reasons why Genting Singapore traded below its average multiple, namely elevated bad debts and falling earnings, are no longer present.


Re-rating catalyst. 

  • Despite the recent turnaround in profitability, some investors remain sceptical over the sustainability of Genting Singapore’s earnings recovery. We believe as we progress throughout 2018, as Genting Singapore selectively extends credit to its VIP customers which should translate to higher y-o-y increase in earnings, this scepticism should subside, resulting in a further re-rating of Genting Singapore’s share price.


Valuation

  • On the back of the Singapore government’s plans to raise the GST rate to 9% between 2021-2025 from 7% currently, we lowered our DCF-based Target Price to S$1.49 from S$1.51. Our valuation excludes the Japan casino.


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 Genting Singapore’s VIP and mass divisions.



WHAT’S NEW - Second consecutive quarterly y-o-y improvement in VIP rolling chip volumes 


4Q17 results in line with expectations

  • Genting Singapore continued its recovery in earnings with 4Q17 adjusted EBITDA and normalised profit (excluding exceptional items) up 9% and 44% y-o-y to S$255m and S$134m respectively which was in line with expectations.
  • The improvement was underpinned by low double digit y-o-y improvement (estimated to be between 10-13%) in VIP rolling chip to c.US$5.5bn (flat q-o-q) up from c.US$4.8bn in 4Q16. This was partially offset by a VIP win rate of 2.7% which is at the lower end of the 2.7- 3.0% theoretical range versus 2.8% achieved in 4Q16.
  • The increase in VIP rolling chip we understand was broad based with growth from China as well as South East Asian countries. Combined mass drop and slots handle gross gaming revenue was also reported to be up over 20% y-o-y. 
  • Genting Singapore earnings was also boosted by a decline in bad debts to c.S$5m from S$39m in 4Q16 and S$14m in 3Q17.
  • However, Genting Singapore adjusted EBITDA was down 20% q-o-q owing to bonuses accrued a year end, higher commissions and lower VIP win rate (2.7% versus 3.1% in 3Q17).

Surprise increase in dividend

  • Genting Singapore declared a 2.0 Scts final dividend taking full year 2017 dividend to 3.5 Scts per share. This is an increase from 3.0 Scts in 2016 and previous guidance of maintaining an annual dividend of 3.0 Scts.
  • We understand the increase in dividend was based on the group’s increased confidence in its future cash flows.
  • For 2018 and beyond, Genting Singapore was unwilling to provide guidance on the potential increase in dividend assuming a further increase in earnings ahead.

Strong financial position

  • Genting Singapore remains in a strong financial position with net cash of c.S$2.7bn (c.S$4.0bn of cash and restricted cash less gross debt of S$1.2bn) as at 31 December 2017, slightly down from S$3.1bn at end 3Q17 as Genting Singapore had redeemed the c.S$500m worth of perpetual securities.

Progress made for Japan casino with Sentosa redevelopment still under discussions with the authorities

  • Genting Singapore guided that the Integrated Resort (IR) execution bill should be introduced in the current Diet session over the coming month or so. Should be the bill be passed, the bill may still take some time to pass the upper house.
  • However, Genting Singapore remains positive on the potential for eventual bidding of an IR in Japan in 2019 with Osaka a location the group is interested in building an IR.

  • Meanwhile, there were no further updates on the potential redevelopment of its Resorts World Sentosa (RWS) property.

Recovery to continue into 2018

  • Heading into 2018, we expect the recovery in earnings to continue with adjusted EBITDA rising 7% y-o-y.
  • Underpinning the sustained recovery is a 10% increase in rolling chip volumes (up from our previously forecast of 7% given a stronger USD-SGD exchange rate 1.35 versus 1.37 previously) as Genting Singapore selectively extends credit to its VIP customers. However, we expect the mass business to remain flat y-o-y. With the increase in earnings, we expect this to translate to a higher dividend of 4.0 Scts up from 3.5 Scts in FY17.
  • For FY19, we expect VIP rolling chip and mass business to increase to rise 3% y-o-y. Based on a slight tweak in our assumptions, we changed our FY18/19F adjusted EBITDA by -1/+2% with our FY18/19F normalised profit higher by 3%/7% on reduced interest costs due to lower than expected borrowings.
  • We have also lowered our DCF-based Target Price to S$1.49 from S$1.51 previously as we imputed higher GST rate from 2021 onwards given plans by the Singapore government to raise GST rate to 9% between 2021-2025, from 7% previously. Our Target Price implies a EV/EBITDA multiple of c.12x in line with Genting Singapore’s average EV/EBITDA multiple.

Maintain BUY call with revised Target Price of S$1.49

  • With earnings expected to continue to recover in 2018 and beyond, we maintain our view that GENS’s share price will re-rate to its average EV/EBITDA multiple of c.12x. 
  • As highlighted in our previous reports, we believe the reasons for Genting Singapore to trade at a discount to its average multiple over the past 2 years, namely rising bad debts and falling earnings, are no longer present.




Mervin SONG CFA DBS Vickers | http://www.dbsvickers.com/ 2018-02-26
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 1.49 Down 1.510



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