Results

• While reported 1Q17 gross revenue of SG$586.6m was in line, core PATAMI of SG$152.0m was above expectations, accounting for 40.7% and 34.4% of HLIB and consensus FY estimates, respectively.

Deviations

• Higher-than-expected EBITDA margin coupled with lower depreciation and amortization charges.

Dividends

• None.

Highlights

• QoQ: 1Q17 revenue was up by 5.2% due to better win rate, on the back of higher volume and market share. Core PATAMI improved by 45.8% due to improved margin after cost rationalization exercise and lower bad debt provisions.
• YoY: 1Q17 revenue contracted by 3.5% attributable to lower gaming volume and lower market share as well as fewer visitors and spending per visitor for non-gaming segments. However, core PATAMI increased by 120.5% buoyed by improved margin due to cost efficiency initiatives such as revised commission fee model and significant lower bad debt provision.
• On capital management, management will redeem both its perpetual securities of SG$1.8bn and SG$500.0m, callable on 12 Sep 2017 and 18 Oct 2017, respectively.
• Post-redemption, GenS is estimated to have a healthy net cash position of circa SG$2bn, interest savings of SG$118m per annum and improved ROE.
• The redemptions of both securities are not expected to dampen GenS? ability to bid aggressively for Japan casino license given its strong balance sheet and ability to raise debt if necessary.
• Dividend is expected to be stable at 3.0 sen for FY17 despite EBITDA trending higher as we expect GenS to conserve some cash for refurbishment of RWS, which is expected to be announced towards the end of this year.
• Management shared that the implementation bill for Japan casino will only to be tabled in Oct/Nov followed by bidding invitation earliest by mid-FY18 should all legislations and approvals are being passed on time.

Risks

• 1) Regulatory risks; 2) Further decline in RWS? market share to MBS; 3) Weaker-than-expected hold percentage.

Forecasts

• We impute the redemption effect of SG$2.3bn perpetual securities and higher margin assumption into our model, leading to higher FY17/FY18 EBITDA by 7.5% and 10.2%, respectively.

Rating

HOLD ↔ , TP: SG$1.11 (↑ )

• Maintain HOLD given the minimal organic growth outlook due to stiff competition and absence of high rollers despite the margin expansion and stable dividend policy. Possible expansion in Japan would be the upside catalyst which has yet to be factored in.

Valuation

• TP is raised to SG$1.11 (from SG$1.01) based on higher EV/EBITDA multiple of 11x (from 9x) after pegging closer to its peers given the more stable state of outlook and improved ROE for GenS as we roll forward our valuation metric to FY18.

Source: Hong Leong Investment Bank Research - 15 May 2017