Genting Singapore (GENS SP) - UOB Kay Hian 2018-02-26: 4Q17 A Respectable Quarter. Waiting For Re-rating Catalysts

Genting Singapore (GENS SP) - UOB Kay Hian 2018-02-26: 4Q17: A Respectable Quarter. Waiting For Re-rating Catalysts GENTING SINGAPORE PLC G13.SI

Genting Singapore (GENS SP) - 4Q17: A Respectable Quarter. Waiting For Re-rating Catalysts

  • Genting Singapore (GENS)’ 4Q17 results are within expectations. 
  • Unsurprisingly, VIP segment continued to achieve positive y-o-y growth in 4Q17 compared with 4Q16’s low base and amid its more relaxed credit policy. Mass market performed decently. 
  • Maintain HOLD. We opine Genting Singapore’s share price would be trading sideways until there is more meaningful development on its bidding for Japan IR. 
  • Target price: S$1.30. Entry price: S$1.15.



RESULTS


Within expectations. 

  • Genting Singapore (GENS) reported a 4Q17 core adjusted EBITDA of S$255m (+9.2% y-o-y, -20.3% q-o-q), bringing 2017 EBITDA to S$1151m, representing 98% of our forecasts. The q-o-q fall in core earnings was due to lower win percentage.

VIP: Growth sustained. 

  • GENS’ VIP rolling chip volume (RCV) recorded another positive growth in 4Q17, after seeing a turning point in 3Q17 (recall that GENS’ RCV fell y-o-y for 12 consecutive quarters prior to 3Q17). We estimate RCV rose close to 10% y-o-y and improved marginally q-o-q. Similar to 3Q17, the respectable volume y-o-y growth was partly attributed to the company’s more relaxed credit policy, and management expects the VIP volume to remain decent going forward. 
  • Separately, we note that GENS’ 4Q17RCV growth outperformed its rival, Marina Bay Sands (-8% y-o-y, -16% q-o-q), with GENS’ market share rising to 41% in 4Q17 (3Q17: 37%, 4Q16: 37%).

Mass market GGR up y-o-y but flattish q-o-q. 

  • We estimate the mass market (table and slot) GGR grew mid-single digit y-o-y but was flattish q-o-q in 4Q17. GENS’ flat mass market GGR is similar to that of Marina Bay Sands’.
  • All in all, GENS’ 4Q17 gaming revenue was up 5% y-o-y but eased 8% q-o-q as 3Q17’s revenue was boosted by better VIP win rate (4Q17: 2.7%, 3Q17: 3.1%). We estimate GENS’ total GGR market share is largely unchanged at 37%.


STOCK IMPACT


Record-low receivables and impairment of receivables… 

  • In 4Q17, GENS’ impairment of receivables and receivables were merely S$4.7m (3Q17: S$14m, 4Q16: S$39m) and S$127m (3Q17: S$138m, 4Q16: S$198m), at respective record lows.

…provide flexibility to relax VIP credit policy to boost VIP volume. 

  • Given the healthy balance sheet, GENS will continue to practice its loosened credit policy (started since 3Q17), to boost VIP gaming volume.

Optimistic on Japan IRC bidding. 

  • GENS is optimistic on the development progress of the establishment of casino gaming industry in Japan, and expects the second bill to be introduced in the upcoming Diet session next month. While there is still a lot of uncertainties for the Japan gaming industry, such as gaming tax and entry levy, GENS remains committed and is going all-out for Japan IRC bidding.

Expecting EBITDA margin of mid-40 in the near term. 

  • Unsurprisingly, GENS’ EBITDA margin tapered off to 44% in 4Q17, from 3Q17’s multi-year high margin of 50.8%, which was partly boosted by good luck factor. After a series of cost-cutting measures and dramatic drop in impairment of receivables in 2017, GENS’ EBITDA margin has probably normalised. We expect GENS to deliver EBITDA margin of mid-40 in the near term (assuming theoretical win rate). 
  • The next catalyst for margin expansion in the medium term could be related to its investments in technology-related projects, which is expected to improve productivity, expand its digital marketing and improve customer experience.

Final DPS of 2 S cents is a modest surprise. 

  • GENS declared a 2 S cents final DPS, bringing full-year DPS to 3.5 S cents, higher than an earlier guidance of 3.0 S cents.
  • Despite the strong financial position, we do not expect GENS to further increase its dividend payment in 2018 as it would need to reserve cash for expansions, which include reinvestment in Singapore properties as well as preparation for Japan IRC bidding.


EARNINGS REVISION

  • We raise our 2018F-2019 forecast by 2% on house-keeping adjustments. We also introduce numbers for 2020.


VALUATION/RECOMMENDATION


Maintain HOLD on GENS with unchanged target price of S$1.30. 

  • Expect GENS’ share to trade sideways (as the current valuation has fully reflected its prospects for Singapore operations) until more meaningful development unfolds (RFP submission expected in 2019) on its bidding for Japan’s IR concession. Moreover, Singapore’s mass market business may be slightly impacted when neighbouring country’s Genting Highland fully ramps up its new gaming facility and opens the 20th Century Fox theme park.
  • Our target price has imputed a 10 S cents Japan “option value” for the Japan greenfield opportunity (assumption: 30% success rate, US$10b development cost with IRR 13% and 50% JV stake). 
  • Target price of S$1.30 implies EV/EBITDA of 10.4x in 2018. Entry price: S$1.15.




Vincent Khoo CFA UOB Kay Hian | Yeoh Bit Kun UOB Kay Hian | http://research.uobkayhian.com/ 2018-02-26
UOB Kay Hian SGX Stock Analyst Report HOLD Maintain HOLD 1.300 Same 1.300



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