GenS will be investing ~SGD4.5bn on an expansion development of Resort World Singapore (RWS). The expansion is expected to be undertaken over a period of 5 years, starting end of 2020 with debt equity ratio of 70:30. Meanwhile, Ministry of Trade and Industry (MTI) Singapore announced a gaming tax hike 3-7% commencing March 2022. Overall, we opine that the tax impact may be mitigated by new earnings contribution from the expansion of RWS in the longer run. Downgrade to HOLD from BUY on GenS with lower TP of SGD1.23 and maintain HOLD on GenT with lower TP of RM6.75.

NEWSBREAK

GenS announced that the group will be investing ~SGD4.5bn on an expansion of RWS. The expansion is expected to be undertaken over a period of 5 years and execution is only expected to start by the end of 2020. The expansion will increase the existing Integrated Resort (IR) by ~50% of new gross floor area. On top of that, the group also announced that they will be expanding its gaming space by 3% to 15.5k sqm from 15ksqm. MTI Singapore has also concurrently announced (1) premium GGR tax hike from 5% to 8-12%; (2) mass GGR tax hike from 15% to 18-22%; (3) casino entry levies for Singaporean and PRs raised by 50% from SGD100 to SGD150 (daily) and SGD2k to SGD3k (annual).

HLIB’s VIEW

Not entirely surprising. We are generally not surprised by the expansion announcement as it has been guided by the management earlier on. However, the magnitude of the capex is higher than our expectation. At debt equity ratio of 70:30, the group will take up ~SGD3bn term loans and the remaining ~SGD1.5bn will be funded internally. Do note that, the group has a coffer of ~SGD4.2bn and a big portion of it will be reserved for the potential IR in Japan.

Pressure from tax hike. Management highlighted that, the group current GGR falls under the Tier 1 tax bracket and is far from Tier 2 which means tax group’s GGR tax is expected to hike by 3% (the lower end of the newly proposed tax Figure #1). Based on our sensitivity analysis, a 1% increase in GGR tax rate will reduce GenS’ EBITDA by 2.1% and PATAMI by 2.5%. Hence, a minimum 3% tax hike would lower GenS’ EBITDA and PATAMI by 6.3% and 7.5% and GenT’s will be negatively impacted by 3.4% and 3.7% respectively.

Best case scenario. Assuming full utilization of the expansion (50% capacity increase in non-gaming revenue, 3% expansion in gaming space) coupled with the expected 3% GGR tax hike, we project that GenS may be able to generate additional EBITDA of ~SGD280/annum while GenT EBITDA will grow by ~RM840m/annum on top of current existing earnings, which we opine is a rather reasonable investment. However, the full impact will only kick in earliest by end 2025.

Forecast. Unchanged as significant capex will only start kicking in 2021, and the revised higher tax rate will only start after the expiry of the current moratorium in Feb 2022.

Maintain Neutral. Downgrade to HOLD from BUY on GenS with lower TP of SGD1.23 (previously SGD1.43) based on FY19 lower EV/EBITDA multiple of 9x (previously 11x) in anticipation of weaker sentiment from tax hike. Post adjustment on GenS our valuation on GenT is lowered to RM6.75 (previously RM7.18), maintain HOLD.

Source: Hong Leong Investment Bank Research - 4 Apr 2019