Genting Singapore - DBS Research 2018-08-06: Keep Your Winning Hand 

Genting Singapore - DBS Group Research Research 2018-08-06: Keep Your Winning Hand  GENTING SINGAPORE LIMITED SGX:G13

Genting Singapore - Keep Your Winning Hand 

  • Genting Singapore (GENS)’s 2Q18 adjusted EBITDA of S$266m (-9% y-o-y) was below expectations due to “bad luck” in the VIP business.
  • However, on normalised VIP win rate, 2Q18 results would have been in line, rising 2-3% y-o-y.
  • VIP rolling chip growth was strong, up c.27% y-o-y, tracking above our initial estimates.



Rally not over.

  • We maintain our BUY call on Genting Singapore (GENS) with a revised Target Price of S$1.55. 
  • While GENS’ share price has recovered marginally since its 1Q18 results as previous concerns over margin pressures subsided, we believe there remains significant potential for the share price to rally strongly. 
  • Besides growing earnings, it is attractively valued for an integrated resort (IR) operating in a duopoly market in Singapore and there is heightened interest of GENS potentially winning a bid to develop an IR in Japan casino over the next 1-2 years.



~ SGinvestors.io ~ Where SG investors share

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

  • Consensus’s Target Price implies an EV/EVITDA multiple that is below GENS’ average multiple of c.12x. We believe GENS deserves to trade at its average EV/EBITDA multiple given a sustained earnings recovery outlook. 
  • Furthermore, the reasons why GENS 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 GENS’ earnings recovery. 
  • We believe as we progress throughout 2018, as GENS 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 GENS’ share price. 


Valuation: 

  • After rolling forward our valuation to FY19, we raised our DCF-based Target Price to S$1.55 from S$1.49.


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 GENS’ VIP and mass divisions. 


WHAT’S NEW - Hit by poor VIP win rate


2Q18 results slightly below expectations but in line based on a normalised win rate

  • Genting Singapore (GENS) reported 2Q18 adjusted EBITDA and normalised profit (excluding exceptional items) of S$266m (-9% y-o-y) and S$159m (+1% y-o-y) respectively. This was below our expectations with 2Q18 adjusted EBITDA representing only 22% of our original FY18 adjusted EBITDA forecast.
  • The underperformance and y-o-y decline in 2Q18 adjusted EBITDA was largely due to “bad luck” with the VIP win rate at 2.6%, below average theoretical win rate of 2.85% and 3.0% achieved in 2Q17. However, on a hold adjusted basis, using a normalised win rate, adjusted EBITDA would have come in at S$293m (+ 2-3% y-o-y) which would have been in line with expectations.
  • On a positive note, Genting Singapore (GENS)’s VIP rolling chip volume was strong, up c.27% y-o-y in SGD terms, following on from the c.34% y-o-y increase in 1Q18. GENS’ market share has now improved to c.50% from mid-30’s in 1H17. We understand the growth was broad based, with demand coming from existing and new customers with no material change in regional mix of customers.
  • Meanwhile, gross gaming revenue for mass and slots in SGD terms was flattish y-o-y, with mid-teen declines in the mass tables offset by an improvement in the slots business. We understand the weakness in mass business was due to increased competition from newly opened casinos in nearby regional markets.
  • The results this quarter was also boosted by a significant decline in impairment of trade receivables. 2Q18 bad debts now stand at S$0.5m, down from S$9m in 1Q18 and S$15m in 2Q17 and peak bad debt of c.S$90m in 2015-2016.
  • Genting Singapore (GENS) also declared an interim dividend of 1.5 Scts (flat y-o-y).

Strong financial position

  • Genting Singapore (GENS) maintained its strong financial position with a stable net cash balance of c.S$3.0bn (c.S$4.1bn of cash and restricted cash less gross debt of S$1.1bn), from 1Q18.

Japan updates

  • Following the passing of the Integrated Resort (IR) implementation bill, Genting Singapore (GENS) guided that the next step will involve the Japanese government forming a gaming/control board (equivalent to the Casino Regulatory Authority (CRA) in Singapore) that would formulate the regulations and guidelines for various cities in Japan to bid to host an integrated resort.
  • It may take another 9-12 months before the regulations are finalised with a request for proposal (RFP) in 2H19. Thereafter, in 1H20, a city will then select an operator, and seek approval from the Federal government for the final approval in 2021. Interestingly, Yokohama has already sought a RFP from potential operators.
  • Thus far there remains uncertainty over whether any land that is available for the development of an IR will be freehold or leasehold (60-year leasehold for Singapore IR’s) and whether the land cost would be fixed (estimated to cost between US$2-3bn for sites in Osaka or Yokohama).
  • While the above are being finalised, GENS is in active discussions with potential Japan partners. It also guided that the group is interested in having an IR in Osaka and Yokohama, having incorporated local subsidiaries in Japan for this purpose. However, it has ruled out any bid for an IR in Hokkaido. Furthermore, at this stage, there is no restriction that would prevent GENS from bidding for two IR in two different cities.

Controlled credit extension

  • Genting Singapore (GENS) maintained its earlier guidance that the group remains on the growth path with GENS selectively extending credit to VIP customers.
  • We believe this supports our view of sustained increase in earnings not for just the remainder of this year but also into 2019.


Raising Target Price to S$1.55 after incorporating stronger VIP volume growth and valuation after rolling forward to FY19

  • Given the strong VIP volume growth year to date, faster than our earlier estimate of 8% growth in SGD terms for the full year, we now assume growth of c.15% for FY18. Tempering this boost to earnings is higher operating expenses to support this growth and potential cost to bid for an integrated resort in Japan. This leads us to raise our FY18-20F adjusted EBITDA and normalised profit by 2% and 3% respectively.
  • After rolling forward to FY19, we also raised our DCF-based Target Price to S$1.55.


Maintain BUY

  • We maintain our BUY call given c.26% upside to our revised Target Price of S$1.55.
  • We continue to believe Genting Singapore (GENS) will continue to report a sustained increase in profitability over the next 2-3 years which should result in GENS trading closer to its average EV/EBITDA multiple of c.12x.





Mervin SONG CFA DBS Group Research Research | https://www.dbsvickers.com/ 2018-08-06
SGX Stock Analyst Report BUY Maintain BUY 1.55 Up 1.49



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