GENS reported its FY16 earnings, beating consensus after reporting the first recovery in VIP business volume in more than two years. However, its sustainability is still too early to conclude as the business remains challenging with economic condition still not favourable. Nonetheless, the legalisation of casino in Japan should be a price catalyst for gaming stocks like GENS, which has indicated keen interest in participating. Meanwhile, the company is committed to an annual dividend of SGD0.03/share in the near future. We keep GENTING?s call unchanged for now pending its 4Q16 earnings release later this evening.

GENS? 4Q16 above. Genting Singapore plc (GENS, Not Rated) managed to sustain its 4Q16 earnings sequentially at SGD104.2m, bringing FY17 core earnings to SGD281.9m which beat consensus estimates by 17%, which was due to higher business volume in 4Q16 albeit luck factor had normalised from superb luck factor in 3Q14. At the adjusted EBITDA level, FY16 earnings of SGD775.8m were within expectations, which made up 96%/105% of house/street?s EBITDA estimates. It declared a final tax- exempt dividend of SGD0.015/share, totalling FY16 dividend to SGD0.03/share vs. SGD0.015/share paid in FY15.

Flattish sequential results. Despite revenue dipping 4% QoQ, 4Q16 core earnings fell slightly by 1% to SGD104.2m from SGD105.8m. This was partly due to lower effective tax rate of 15% as opposed to 22% previously. As the luck factor has normalised to 2.8% for VIP segment from the win rate of 3.3% in 3Q16, the VIP rolling chip volume recovered to c.SGD7.02b from c.SGD6.06b, to boost bottom-line, although market share slid slightly to 37% from 38% previously. Elsewhere, the win rate for non-VIP was maintained at 24%. As a result, adjusted EBTIDA was flat at SGD233.7m with margin improving to 42% from 40% previously.

Business volume still subpar from last year. 4Q16 core profit surged 67% YoY from SGD62.5m in 4Q15 although revenue only inched up 2% which was due to lower win rate of 2.1% recorded in 4Q15 compared to the normalised rate of 2.8% in 4Q16 despite VIP rolling chip volume falling from c.SGD8.76b last year. As a result, adjusted EBITDA margin improved significantly to 42% from 33% previously. In FY16, core earnings declined 24% to SGD281.9m from SGD370.1m while top-line contracted 7%, owing to depressing business volume. Thus, overall adjusted EBITDA margin declined to 35% from 38% previously.

Better outlook? Management seems to be less pessimistic this time around. It has the confidence to face challenges, although the overall market remains tough. The sustainability of recovery in business volume is still too early to conclude since 4Q16 is the first quarter of recovery after several quarters of decline. Meanwhile, the cost-cutting exercise had been completed and now is the time to bring in more revenue to boost bottom- line. Focus remains in growing the mass and premium mass markets. Management shared its views on the upcoming new casino license in Japan in which it has indicated keen interest of participating. It foresees a likely investment size of USD7b-USD12b for an Integrated Resort project there. The bidding process, if any, is likely to be latest by this year end as the bill is likely to be tabled in Autumn Session, which is in September and October.

Maintain GENTING?s call for now. We are keeping our OUTPERFORM call, price target RM9.14/share and estimates for GENTING unchanged for now, pending the release of its 4Q16 results later this evening. Risks to our GENTING?s call include continuous weak business volume and poorer luck factor.

Source: Kenanga Research - 23 Feb 2017