Genting Singapore (GENS) - UOB Kay Hian 2019-04-04: World-Class Commitment

GENTING SINGAPORE LIMITED (SGX:G13) | SGinvestors.io GENTING SINGAPORE LIMITED (SGX:G13)

Genting Singapore (GENS) - World-Class Commitment

  • The Singapore government’s just-announced measures for the gaming sector are slightly negative for the near term but positive for the long term. 
  • Key measures include a 50% increase in gaming entry levy (minor negative impact on GENTING SINGAPORE LIMITED (SGX:G13)), and a two-tier gaming tax system for both the VIP and mass segments from 2022. In return, exclusive rights are extended until end-30 with expanded gaming capacity.
  • Maintain BUY on expected slight weakness but we trim target price to S$1.26 from S$1.32.



WHAT’S NEW


New tax measures via higher levy and gaming duties (from 2023) slightly dilutive to earnings...

  • The Singapore government announced:
    1. an immediate 50% increase in casino entry levy for local citizens and permanent residents;, and
    2. a new (higher) two-tier gaming duties within the VIP and mass segments (see attached PDF for announced measures).
  • The levy hike should have only a modest impact on GENTING SINGAPORE LIMITED (SGX:G13)’s earnings and likewise, the new gaming duty’s estimated 6-7% direct impact on Genting Singapore’s 2022 EBITDA should be offset by the incremental gaming and non-gaming earnings from RWS’ hefty cumulative future reinvestments of at least S$4.5b.

…but more than neutralised by certainty to incumbents’ exclusive rights and capacity expansion.

  • A major positive is the government’s affirmation and extension of the exclusivity concession period for Resorts World Sentosa (RWS) and Marina Bay Sands (MBS) through to 2030 (the exclusivity period ended in 2017), and both casinos’ maximum expansion of gaming space from 30,000sqm to 32,500sqm alongside the expansion of non-gaming facilities.
  • The gaming expansion is envisioned to attract and enlarge the premium mass segment.


STOCK IMPACT


Modest impact from 50% rise in entry levy for locals.

  • While the immediate new entry levy (S$150 per entry or S$3,000 per year per casino) is a hefty 50% increase, we gauge only a modest impact on Genting Singapore’s GGR and EBITDA, given its relatively modest dependence on local mass-market gamers.
  • Our assessment assumes:
    1. the local VIP patronage continues to be inelastic to the entry levy;
    2. local patrons make up only about 20% of mass-market GGR (which represents 12% of Genting Singapore’s group GGR); and
    3. most of the local mass-market patrons would not significantly curtail their propensity-to game (perhaps fewer trips but mostly compensated by higher spend per trip).

Longer-term earnings impact from gaming duty hikes should be more than offset...

  • From Mar 22, a two-tier gaming duty structure would be introduced at both the VIP and mass segments, with the base duty rates raised by 3ppt from the current respective levels. The duty increase would directly reduce Genting Singapore’s EBITDA (using 2018 as a base) by only 5- 7% (S$62m-85m) assuming a 64:36 VIP-to-mass GGR mix.
  • This analysis assumes Genting Singapore would incur only the minimum 3ppt effective hike in gaming duty as Genting Singapore’s current VIP ( < S$1b) and mass GGR ($1.5b) are well below the respective thresholds for the step-up rates of S$2.4b for VIP and S$3.1b for mass market.

…by non-gaming and gaming capacity expansion.

  • Income enhancements to the non-gaming segment (which accounted for 34% of 2018 group revenue) should well offset the cumulative levy and duty hike impact (estimated EBITDA impact of S$124m-147m), assuming a fairly conservative 10-year EBITDA payback period for an assumed S$4.5b cumulative reinvestments (which would be mostly for the expansion of non-gaming facilities).
  • Zooming into the 1,100 hotel room expansion (which represents a 45% room expansion), our conservative revenue and EBITDA enhancement would be round S$120m and > S$33m respectively (assumptions: S$240 RevPar, hotel F&B and other ancillary revenues equivalent to 30% of room revenue, and 30% EBITDA margin).
  • However, one disappointment is the speculated relaxation on junket rules did not materialise, which would have been a big game changer for the gaming industry.


EARNINGS REVISION/RISK

  • Reducing our 2019-21 EBITDA forecasts by 5%, after factoring in lower local visitations.


VALUATION/RECOMMENDATION


Maintain BUY but trim target price to S$1.26 from S$1.32.

  • Our new target price, which implicitly recognises the longer payback period for its commitment to make hefty reinvestment in Singapore, is based on a below historical average EV/EBITDA of 9x (historical average: 11x) plus a 10 S cent option value for the Japan concession. Genting Singapore continues to trade well below most of the regional peers’ even after the recent Genting Singapore’s share price uptrend and earnings cut.
  • While we expect modest downside knee-jerk reaction, we expect investors’ focus to eventually shift from the immediate levy and future duty hikes to its decent long-term chances of clinching a Japan concession gaming coupled with growth opportunities at home.


SHARE PRICE CATALYST






Vincent Khoo CFA UOB Kay Hian Research | https://research.uobkayhian.com/ 2019-04-04
SGX Stock Analyst Report BUY MAINTAIN BUY 1.26 DOWN 1.320



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