BUY RM2.05 KLCI : 878.81
Price Target : 12-month RM 2.60
Low risk of cash call by SCL
Following our gaming sector report “Emerging Value” on 24
Mar 09 where we upgraded Resorts to Buy (from Hold), we
see little risk of 19.6%-owned Star Cruises (SCL, Not Rated)
calling for a rights issue now. This is due to: (i) Cancellation
of order for one new vessel (US$1b savings), (ii) minimal
amount due for 50% stake in Travellers International
(US$50m), while Newport City (Philippines casino project) is
expected to be completed by end09, (iii) Padgor City and
Macau projects are still at early development stages, and (iv)
NCL's improving net gearing (to 153% from 253%). Hence,
the implied 60% discount the market ascribed to Resorts’
net cash is excessive, in our view. Reiterate Buy on Resorts -
market is pricing its resilient gaming business at only 6.9x
2010 PE (ex-cash). Our RM2.60-TP is based on 14.2x 2010
PE (similar to SARS level), supported by RM2.55 sum-of-parts
value. Tan Sri Lim Kok Thay & family owns 60% (direct
stake) in SCL.
Cancels order for one new vessel, Travellers stake almost
fully paid up. 50%-owned NCL was supposed to take
delivery of two vessels in 2010. However, based on latest
SEC filing, NCL is expecting only one in 2010 worth ~US$1b
vs a total US$2.2b previously. Specific funding is already in
place. Additionally, the balance of US$50m for its 50% stake
in Travellers is only due upon commencement of Newport
City casino.
Padgor City and Macau projects still at early stages. Both
projects are likely to be developed later rather than sooner,
given the on-going financial crisis. Padgor City (SCL's
effective stake: 70%) is still at preliminary stages while the
HK$4.7b or US$610m Macau project (SCL-SJM 75:25 JV) is
awaiting approval to commence construction.
Improving net gearing. With the US$1b cash injection by
Apollo Management in Jan08 after acquiring a 50% stake in
NCL, NCL's net gearing improved to 153% in 3Q08 from
4Q07's 253% (net debt: US$2.4b vs US$3.1b previously).
SCL’s 2Q08 net gearing was 28% (net debt: US$545m),
better than 4Q07’s 176% partly due to NCL’s reclassification
to jointly controlled entity (net book value: US$729m).
Highlights
Stake in Travellers almost paid up. The US$335m price tag
for a 50% stake in Travellers is almost fully paid (US$285m
paid upon signing of sale and purchase agreements), with
the balance of US$50m due upon commencement of
Newport City casino (likely by end-2009, and should
contribute positively to SCL’s earnings). Recall that Travellers
was granted a Provisional Licence to participate in the
development of two tourism projects in the Philippines -
Newport City and Bagong Nayong Pilipino Entertainment
City Manila (Padgor City).
Exposure to Newport City cost overrun is capped. Based on
the shareholders' agreement between SCL and Alliance
Global Group Inc (AGI), which owns the other 50% stake in
Travellers, cost overrun incurred to complete the Newport
City project (i.e. above the agreed ceiling price of US$150m
for which funding is in place) would be solely absorbed by
AGI at no cost or recourse to Travellers. And agreed revision
to plans would be funded by third party financers, to be
undertaken by Travellers.
Challenges ahead, diversifying from cruise line. We expect
SCL’s earnings to remain in the red (ex-exceptionals), but
support could come from: (i) new bookings as cancellations
stabilise, and (ii) lower fuel cost. Demand will likely remain
weak while competition should intensify with incoming supply of
vessels (according to some media report, Carnival
Cruise Lines estimates the industry could see a 28% increase
in capacity in North America and Europe over the next three
years, although this could be partly mitigated by some
vessels being retired/cancelled).
Nevertheless, SCL seemed to be diversifying from cruise lines
to land-based casinos (Macau and Philippines), which are
less volatile and capital intensive. This would likely be
positive in the longer term. With the entry of Apollo
Management in NCL (50% stake), we do not discount the
possibility of potential synergies with its stable of gaming
investments i.e. Harrah Entertainment and Ocean Cruise.
Reiterate Buy, gaming business at only 6.9x 2010 ex-cash PE.
This is near 1998 all-time low valuation. Although average
spending could ease due to lesser VIP patrons with the
commencement of both Singapore integrated resorts by
2010, casino patronage/ visitor arrivals to Genting Highlands
is expected to remain resilient as in the past. We expect
Resorts to continue to chalk strong operating cashflow of
RM1.3b (average) over the next three years. Other risks: high
foreign shareholding (33%) and more corporate
governance/capital management issues (related party
transactions, investments with poor earnings visibility) –
which has largely been priced-in given the large implied
60% discount the market ascribed to Resorts’ net cash.
No comments:
Post a Comment