Genting – Investing into MGM?

Price: RM4.88
Target Price: RM5.90
Recommendation: BUY

· Buying US$100m MGM’s bond. Genting and Resorts had each subscribed to US$50m senior secured notes issued by MGM Mirage as part of its US$2.5b fund raising (US$1b stocks; US$1.5b bond) exercise to settle some of its outstanding debts. Each US$50m note features: a) US$25m nominal amount of 10.375% notes due May 2014; and b) US$25m nominal amount of 11.125% notes due Nov 2017. The notes were assigned a B and B1 ratings by S&P and Moody respectively.

· Backed by Bellagio and Mirage. The issued notes are secured on the assets of the Bellagio Hotel and Casino and The Mirage Hotel and Casino located in Las Vegas, thus giving downside risk protection to the note holders.

· MGM and its financial status. MGM Mirage, which is one of the world’s leading gaming firm operates 16 wholly-owned casino resorts and has a 50% investments in 4 other casino resorts in Nevada, New Jersey, Illinois and Macau. MGM’s 1Q09 revenue was down by 20% to US$1.5b on the back of increased convention cancellations, continued decline in visitor spending and lower hotel occupancy (1Q09:87% vs 1Q08:93%). Net profit however dropped only 11% yoy to US$105.2m due to a US$190m pre-tax gain resulted from the $775m sales of Treasure Island Hotel and Casino to Ruffin Acquisition. As of 31 Mac 09, MGM is saddled with total $14.4b debt with a net gearing of 3.2x.

· MGM feeble still even after US$2.5b fund raising with $1b debt maturing each for 2009 and 2010. More debts are maturing including c.$500m in 2011 and 2012 each with another $1.4b due in 2013 which should continue to pressure cashflow. With expected weak market conditions over the next few years on the back of a poor US economic outlook, MGM is likely to put another one or two assets up for sale in the next 6 – 12 months to pare debts further.

· MGM Macau to look for new partner? The Wall Street Journal reported on 20 May 2009 that the New Jersey Division of Gaming Enforcement recommended MGM to disengage itself from Pansy Ho, which is its current partner with a 50% stake in MGM Grand Macau. Pansy Ho is considered “an unsuitable person” under the New Jersey Casino Control Act. Following this new development, we believe MGM could potentially divest its stake in MGM Grand under regulatory pressure.

· MGM Grand Macau fits well into Genting’s expansion plan. It has always been Genting’s aspiration to be the leading regional gaming player. Genting is set to strengthen its foothold in the ASEAN gaming market through its investments in Resorts World@Sentosa and Star Cruises JV with the Travellers Hotel in Philippines to develop Manila Bay and Newport City. What the group currently lacks is the exposure to Macau market where most major gaming players already have established operations. Should MGM Grand Macau be up for sale as we postulated, it could offer Genting an excellent opportunity to immediately access Macau gaming market without going through the lengthy asset building process. Project cost for the MGM Grand Macau was reported to be about $1.3b. Even if MGM demands for a premium on top of its 50%-stake of $0.7b, we believe Genting has no problem funding the acquisition through Resorts which is still sitting on a huge cash coffer of RM4.55b (US$1.3b based on RM3.50/US) as of 31 Dec 08.

· Neutral on the MGM notes purchase as the interest income is relatively insignificant despite attractive rates. We are however more excited about the potential entry of Genting into the Macau gaming market given the new regulatory concerns on MGM’s tie up with Pansy Ho. The acquisition of MGM Grand if materialise could be a huge re-rating catalyst for both Genting and Resorts. No change to our forecasts and BUY recommendations for Genting (TP:RM5.90) and Resorts (TP:RM3.52) while we await for more details from the upcoming tele-conference session for 1Q09 results.