Genting Singapore - CGS-CIMB Research 2019-04-04: Resorts World Sentosa ~ Hit The Reset Button

GENTING SINGAPORE LIMITED (SGX:G13)

Genting Singapore - Resorts World Sentosa: Hit The Reset Button

The redevelopment of Resorts World Sentosa (RWS) is necessary for Genting Singapore to stay relevant among integrated resorts operators, in our view.
However, higher investment cost, levies to be introduced on 4 Apr and gaming taxes from CY22F onwards are near-term downers to Genting Singapore share price.
Maintain ADD as we like RWS 2.0’s longer-term benefits, but we lower our Target Price as these near-term plans will likely reset its earnings growth and cash pile.

We believe GENTING SINGAPORE LIMITED (SGX:G13)’s redevelopment plans for its RWS property (dubbed RWS 2.0) are necessary as it will usher in a more relevant offering for its target market of premium customers and millennials. However, upfront investment, higher levies and gaming taxes are near-term risks.
We maintain our ADD call as we remain positive on Genting Singapore in the longer-term, but lower our FY19-21F EPS and target multiple to 8x (close to -0.5 s.d. below average mean, 9x prev.) which leads to a lower Target Price of S$1.11.
Potential catalysts are higher earnings and Japan bid.
Risks are vice-versa.

The redevelopment is necessary, in our view, as RWS 1.0 is dated and hotel capacity is constrained. Despite the higher price tag of S$4.5bn (vs. consensus estimates of S$1bn- 2bn), the plans are extensive with nearly all key attractions and meetings, incentives, conferences and exhibitions (MICE) facilities being refurbished/expanded.
Plans include up to 1,100 new rooms (on an enhanced waterfront promenade) and a driverless transport system (DTS). We expect such plans to ramp up visitor footfall and stickiness once completed in about 5 years’ time (FY24/25F). Moreover, the extensive investment led to the Singapore Government extending Genting Singapore’s exclusivity period until end-2030, and allowing additional gaming provisions (additional 500 sq m of approved gaming area (AGA) and 800 gaming machines (currently 15,000 sq m) post the completion of the new attractions and facilities.

The daily levy for Singaporeans and permanent residents (PRs) will be upped by 50% to S$150 (from S$100) and annual levy to S$3,000 (from S$2,000). Gross gaming revenue (GGR) will also be subject to a higher-tier casino tax structure from Mar 2022 onwards (See Fig2 in attached PDF report).
Given that this will be put into effect before the completion of RWS 2.0, we believe there could be some impact on near-term earnings growth.

Genting Singapore guided that construction will start in earnest from FY20F, with capex weighted towards FY23-24F. It is also considering project financing. This leaves most of the current cash pile (c.S$4bn) for a Japan endeavour which Genting Singapore is still keen on.
Genting Singapore also guided that it is unlikely to tap into equity markets for funding, and is comfortable maintaining its dividend payout. Gearing could increase by FY20-21F, in our view.

Construction will likely begin in earnest in 2H20F, and Genting Singapore plans to refurbish the key attractions in phases to minimise the disruption and maintain footfall at RWS.
Management mentioned that it is positive that
1. new hotel rooms (expected to be completed in CY24-25F) will ease the ongoing hotel capacity constraints it has been facing (average ~95% historical occupancy);
2. expansion of MICE facilities will enhance events being held at RWS and
3. the driverless transport system (DTS) is critical as this will enhance the footfall for Sentosa Island and in turn, for RWS.
The redevelopment plan adds c.50% of new gross floor area (GFA), or about 164k sq m.
Given the extensive investment in revamping RWS, the Singapore Government has extended the exclusivity period for the two Singapore casinos to end-2030 and allowed for both IRs to have additional gaming provisions. For Genting Singapore, this entails an additional 500 sq m of approved gaming area (AGA) and 800 gaming machines (currently 15,000 sq m). These will, however, only be accessible post the completion of the agreed upon investments in new attractions and facilities.

The Singapore Government also announced that the daily levy for Singaporeans and PRs will be upped by 50% to S$150 (from S$100) and annual levy to S$3,000 (from S$2,000) starting from 4 Apr 2019.
Gross gaming revenue (GGR) will also be subject to a higher-tier casino tax structure from Mar 2022 onwards. GGR is currently subject to casino tax rates of 5% for premium gaming and 15% for mass gaming, but post Mar 2022, these rates will initially be raised by 3% for both segments, then increased further once GGR reaches a certain level. This was a negative surprise for us, and poses medium-term risk as these measures will be implemented ahead of RWS 2.0.

We lower our FY19-21F EBITDA by 1.1%-3.2%, largely on the back of lower GGR and non-gaming revenue as we foresee the annual increase in levies could lower mass gaming visitation, non-gaming revenue could see slower growth once renovations begin and there could be higher opex costs as Genting Singapore gears up for the renovations. We also foresee higher interest costs.
Overall, we reduce our core EPS by 0.9%/5.9%/10.3%. We also pencil in lower cash as capex kick-starts for RWS 2.0 from CY20F onwards.
We lower our CY20F EV/EBITDA target to -0.5 s.d. below average mean to account for the sluggish earnings growth and potential lack of catalysts in the near-term. See Fig3 in attached PDF report for detailed forecast revisions.
All this results in a new Target Price of S$1.11 (vs. S$1.28 previously, see Fig4 in attached PDF report for valuation details), but we maintain our ADD call as we still see positive long-term prospects.

Cezzane SEE CGS-CIMB Research | https://research.itradecimb.com/ 2019-04-04

SGX Stock Analyst Report ADD MAINTAIN ADD 1.11 DOWN 1.280