Genting Singapore - UOB Kay Hian 2020-07-02: Upside Hinges On Decision On Japan Bid; Downgrade To HOLD


Genting Singapore - Upside Hinges On Decision On Japan Bid; Downgrade To HOLD

  • After a prolonged closure in compliance with the government’s Circuit Breaker measures, Resorts World Sentosa (RWS) is finally allowed to reopen from 1 July. However, a slow recovery is expected with impediments on international travel into Singapore and reduced gaming capacity.
  • While we still like Genting Singapore (SGX:G13) for its appealing yield, further near-term upside to Genting Singapore's share price hinges on whether it pursues the Japan IR which bears an uncertain payback.
  • Downgrade to HOLD. Target price: S$0.80.
  • Entry price: S$0.68.

Granted green light to recommence operations.

  • With the COVID-19 Circuit Breaker measures in Singapore coming to an end, integrated resorts and casinos including Resorts World Sentosa (RWS) have been granted permission to resume their operations on 1 July. See Genting Singapore Announcements.
  • To recall, RWS was temporarily closed since 7 April to comply with the government’s lockdown in reaction to the sharp rise in COVID-19 infections.

Genting Singapore's earnings recovery will take time.

  • While Resorts World Sentosa (RWS) is now reopened, entry to casinos will be limited to only Genting Reward members and annual levy holders. Nevertheless, we deem that revenue recoveries will be weak despite resumption of operations as:
    1. RWS still significantly relies on foreign tourists, and
    2. limitations of running at 25% of gaming capacity due to social distancing set-ups.

Genting Singapore’s commitment to Japan’s IR bid a near-term negative.

  • Despite the COVID-19 impact and recent withdrawals of many US bidders such as Las Vegas Sands (citing non-viable regulatory framework), Genting Singapore appears to remain in pursuit of the Japan integrated resort (IR) concession (Yokohama).
  • Yokohama’s Request for Proposal (RFP) process will start at around July after the federal government’s basic policy is finalised and the results will be known at the year end.
  • Genting Singapore will also participate in Tokyo’s bid when it is rolled out. However, bidding for the Japan IR licence during this challenging period does not seem compelling as the high capex commitment coupled with stringent regulatory framework diminishes the attractiveness of the Japan IR.

Recommencement of operations but less optimistic.

  • While RWS has reopened in July with Universal Studios Singapore, S.E.A Aquarium and the casino back in business, we remain cautious on 2H20’s outlook due to lingering uncertainty that visitors and earnings could plummet y-o-y and take time to normalise. Meanwhile, the prolonged lockdown, international travel impediments, tightening borders restriction or further escalation of the COVID-19 outbreak remain key risks to earnings.

Weaker 2020 earnings but expecting gradual recoveries in 2021.

  • We gauge that 2020 will be wash-out year for Genting Singapore as 1H20 earnings will take a heavy toll from plunging hotel occupancy rates and gaming revenues before the lockdowns, and zero revenue during the temporary closures in the lockdown periods. Significant reduction in the number of travelers from China and other neighbouring countries such as Thailand and Malaysia, as well as reduced capacity on stringent social distancing set-ups will affect non-gaming ticket sales, casino rolling chip volumes, hotel occupancy and the F&B segment.

Hopes for better arrivals after reopening of borders.

  • Positively, authorities are finalising the relaxation of border restrictions to neighbouring countries with relatively lower COVID-19 cases, such as Malaysia, Brunei, Australia, New Zealand, Macau, Taiwan and Vietnam. Successful lifting of travel restrictions would drive up RWS’ earnings, given its high dependency on foreign visitors. This could signify a potential recovery of up to 80% of pre- COVID-19 tourist arrivals.

Sizeable cost savings from government’s booster.

  • Positively, Genting Singapore could gain significant cost savings of about S$91m from the government’s stimulus and job support schemes. This is derived from our assumptions that about 72.5% of Genting Singapore’s 9,373 employees are locals or PRs with average monthly salary of S$2500, and that 75% of their salaries will be supported by the JSS for 3 months, and 25% for 7 months.
  • Genting Singapore will also benefit from tax savings of about S$20m from the 60% property tax rebate granted by the government in previous Resilience and Solidarity Budgets, and additional savings of S$2.6m from foreign worker levy waiver & rebates. This will result in a total cost reduction of approximately S$91m, which represents 28% of our 2020 EBITDA forecast.

Japan’s IR’s profitability is likely to be clouded by a stringent regulatory framework

  • Japan’s IR’s profitability is likely to be clouded by a stringent regulatory framework (Japan’s gaming floor cannot span more than 3% of total space) and restrictions on locals, given that they will be charged an entrance fee and with limitations on the number of local visits (the backbone of casinos are recurring customers).
  • Furthermore, Japan’s current IR window term of five years is difficult for operators to realise ROIs as the payback period for large IRs is 7-9 years. With Japan’s regulatory environment shaping up to be unrealistic for operators to be profitable, a few giant bidders such as Las Vegas Sands and Wynn Resorts have withdrawn their interest in the IR bidding.
  • Should Genting Singapore win the Japan bid, we may have to review our post-2020 dividend assumptions, given the deteriorating near-term cashflow outlook, hefty RWS 2.0 capex and capital commitment for the Japan IR.

Lucrative dividends a share price cushion.

  • Cash-flushed Genting Singapore now features an appealing dividend yield of up to 5.3%, and should sustain a 3.5-4.0 S cents DPS in 2020-21 (2019: 4.5 S cents) despite sharply lower prospective earnings. See Genting Singapore Dividend History.
  • In fact, Genting Singapore can still choose to maintain its DPS payout in 2020, given its net cash of S$3.95b (33 S cents/share), and there is still a possibility of it doling out a special dividend should it fail to win the Japan casino concession (results should be known by 2H20).

Downgrade to HOLD

Vincent Khoo CFA UOB Kay Hian Research | Jack Goh Tooan Orng UOB Kay Hian | 2020-07-02
SGX Stock Analyst Report HOLD DOWNGRADE BUY 0.800 SAME 0.800