Genting - Worth A Bet

PublicInvest

Publish date: Wed, 12 Sep 2012, 01:20 PM

We initiate coverage on Genting Berhad (GENT) with an Outperform call and a target price of RM10.40 based on sum-of-parts valuation. The counter offers exposure to both mature and growing gaming markets, and also owns attractive cash-generating plantation and power assets. Although its share price has suffered a setback recently, Genting‟s fundamental businesses remain strong, and will continue growing steadily in years to come.

Resorts World Sentosa. The crown jewel of the group, Genting Singapore contributed 37.9% and 50.2% of group revenue and EBITDA respectively in 2011. While this has been a challenging year for RWS, we opine that the favourable business environment created by the Singapore government will nurture continuous growth for both casinos in the island republic. We derive a fair value of SGD1.27 for Genting Singapore based on FY13 EV/EBITDA valuation, forecasting lower revenue growth and margins for FY12 AND FY13.
Genting Malaysia. Although encountering a few setbacks in its overseas expansion, the underlying business is still resilient, underpinned by the steady Malaysian operations. And while the US is considered a mature market, GENM has planted itself in the segment that is forecasted to grow the fastest, ie the regional casino market. Improvements in global economic conditions and a successful turnaround of the UK business could potentially yield surprises on the upside.
Target price of RM10.40 based on sum-of-parts valuations. We derive our target price of RM10.40 based on FY13 sum-of-parts valuation. Even with conservative assumptions, Genting presents an attractive 15.8% upside from the current price.

Company Background

Genting Berhad (Genting) was incorporated in 1968 to operate a hotel and casino, and to develop an integrated tourist complex in Genting Highlands, Malaysia.The shares of Genting Berhad were listed on the Main Market in 1971. A restructuring exercise was undertaken in 1989, which involved the initial public offering and listing of Genting Malaysia on Bursa Securities and resulted in Genting Berhad's becoming an investment and management company.

Currently, the group owns and operates casinos in Malaysia, UK and US through its 49.4%-owned listed subsidiary Genting Malaysia, and owns one of the two casinos in Singapore through 51.9%-owned subsidiary Genting Singapore, which is listed in the Singapore Exchange. The group is involved in palm oil production and property development through its 54.6%-owned listed subsidiary Genting Plantations. Genting is also involved in the power business and has interests in oil and gas ventures in Indonesia.

Kien Huat Realty SB, which is controlled by the family of founder Tan Sri Lim Goh Tong, is the major shareholder of Genting with a 32.2% stake.

Genting‟s revenue and earnings are mainly derived from the leisure and hospitality segment. With the opening of Resorts World Sentosa (RWS) in 2010, contributions from this segment surged to more than 80% from 70% previously. The power segment is the second largest contributor, followed by plantations. However, following the sale of Genting Sanyen in August 2012, the plantations segment is expected to take over the position as contributions from the power segment would be reduced significantly.

Leisure and Hospitality

Since its opening in 2010, RWS has overtaken RWG to become the main contributor in leisure and hospitality revenue, charting growth of 22% and 19% respectively in revenue and EBITDA, while the Malaysian operations grew at 7%. RWS also yields higher EBITDA margins at 52% (2010: 53%) compared to RWG at 49% (2010: 49%), while UK EBITDA margins are at the 10-14% level.

Resorts World Sentosa

The phenomenal success of Singapore‟s gaming industry has become the envy and subject of reference for governments all over the world who are seeking to liberalize or grow their gaming industries. In the short span of two years, Singapore has become one of the biggest gaming markets in the world. It has also been projected to be the fastest growing market after Macau.

Star of the show. Being one of the casinos operating in the duopoly environment in Singapore, RWS has been able to enjoy steady earnings that justified its hefty SGD6bn investment in building the property, which is one of the most expensive casinos in the world.

RWS derives 80-84% of its revenue from gaming operations. VIP gamblers contribute to more than 50% of the gaming revenue. Compared to the Malaysian operations, where mass market constitutes about 65% of gross gaming revenue, RWS is more susceptible in fluctuations in earnings, as VIP gaming revenue tends to be more volatile due to the combination of lower volume but higher value bets, which results in larger swings as win rates deviate from the theoretical average.

Stiff competition between RWS and Marina Bay Sands (MBS). While there is not much differentiation in terms of VIP gaming, their mass market targets differ with RWS being more family-oriented with its Universal Studios theme park, Maritime Xperiential Museum and the soon-to-be-opened Marine Life Park. However, RWS has been lagging behind MBS recently in terms of market share. With the opening of the West Side attractions, it is hoped that RWS can reclaim market share by attracting more high-end gamblers with exclusive offerings of beachside villas, luxury spa and etc.

Junket operators are a key factor in the profitability of casinos and may even boost market growth by organizing and helping to arrange credit for high-rollers from other territories, mostly mainland China. So far only two junket operators have been approved by the Singaporean Casino Regulatory Authority (CRA), and both are licensed to work with RWS. Their impact on VIP revenues thus far have been insignificant, given the current challenging environment and stringent rules imposed by the CRA.

Regulation calls the shots. We perceive that prevailing regulations pertaining the gaming industry are pivotal to RWS‟ success. Mindful of the economic benefits brought about by the two integrated resorts (IRs), the CRA has to strike a delicate balance in providing an environment to help the IRs succeed but at the same time containing its costs to the local society.

Hence, the Singaporean government is on one hand maintaining the duopoly environment till 2017 while providing a favourable tax structure (5% gaming tax on VIP segment, 15% on mass market compared to a rate of 25% in Malaysia), while on the other hand it is imposing strict controls on junkets and discouraging local patronage to the casinos. Singaporean citizens and permanent residents are discouraged from visiting the casinos by exclusion orders and the imposition of a casino entry levy of SGD100 per day or SGD2,000 per year, subject to strict enforcement by the CRA. Recent plans to toughen its casino laws and allow the CRA to impose a fine of up to 10% of annual revenues further affirm the government‟s determined stance in the matter.

Fair value of SGD1.27. We derive a fair value of SGD1.27 for Genting Singapore based on 2013 EV/EBITDA valuations, taking into account lower margins due to the higher operating expenses from the full opening of attractions in the West Zone. Our 2012 and 2013 EBITDA margins are forecasted at 46.2% and 47.8% respectively. We are also taking a conservative outlook for RWS in view of uncertainties in the global economic condition; hence we are forecasting faster growth in its non-gaming revenue compared to gaming revenue in 2013, ie 10.7% for the former versus 6.5% for the latter. Total revenue growth forecasted for 2012 and 2013 are -6% and 7.5% respectively.

Our target multiple for Genting Singapore is 10.1x, which is a 30% premium to our target multiple for Resorts World Genting. We consider the premium justified due to the higher growth of the Singaporean market and higher gearing of Genting Singapore.

Valuation

We arrive at our target price of RM10.40 based on sum-of-parts valuation. All valuations of Genting‟s listed assets are based on our fair values for the respective entities, with the exception of Landmarks, which is based on market price. Our GENM target is based on FY13 sum-of-parts valuation, whereas Genting Singapore‟s fair value is based on FY13 EV/EBITDA.

For our valuation of Meizhou Wan power plant, we have made the following key assumptions: 1) Minimum sales of 25000 hours of electricity generation in 5 years as stipulated in the PPA. Sales usually exceed the minimum amount, thus there may be more upside than our forecast. 2) Forecast of cash flow up till 2025, which is the expiration of the PPA. 3) Discount rate of 7.5% according to Genting‟s internal discount rate used in its impairment test for the plant in 2011. 4) Average yearly hike of 3-4% to compensate for rising fuel costs and maintenance costs for 5 years, beyond which we forecast 0% growth.

Other assets such as oil & gas and Jangi wind farm are valued at net book value. Our net cash forecast for the purpose of valuation excludes Genting Malaysia and Genting Singapore‟s net cash/debt positions as our valuation for the two companies have already taken that into account.

Source: PublicInvest Research - 12 Sep 2012

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Be the first to like this. Showing 6 of 6 comments

jenisqitny

wow, try to hardsell Genting. No doubts Genting has a strong platform on the business, but the way the shareholders were treated recently on the interim dividend of 3.5sens was a big disappointment.

2012-09-12 13:31

Jonathan Keung

as a Dividend play- big disappointment

2012-09-12 13:55

amywo

Hold for 3 months and sold at loss of 2K yesterday. Such a sub-standard share!

2012-09-12 14:33

jenisqitny

Dispose Genting Sanyen of don't know how many billion cash on hand, Genting Group only declare 3.5sens dividend to their shareholders and all the money goes to director's salary. This is what we called Genting Group, pathetic....

2012-09-12 15:19

Jonathan Keung

estimated cash pie - around 5.0- 6.0 billion under genting group

2012-09-12 15:25

jenisqitny

Genting shares sunk from 11.++ to 8.++, the big boss also don't give a damn. Don't bother to do something to convince back their shareholders, that's why genting share price not moving lately.

2012-09-12 15:30

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