What's new - We are downgrading Resorts World from Buy to Sell with a new target price of RM2.37 (from RM3.33), as we believe the discount to its DCF-derived RNAV will widen as we move closer to the opening of the Singapore Integrated Resorts Casino (Singapore IR) in 1Q 2010.
§ Widening discount on unknown impact - Singapore IR is the first real competition to Resorts World and it is unclear how the neighboring casino could impact its bottom line. We see little negative earnings impact on a long-term basis, but difficulty quantifying the impact in the short-term is likely to result in the stock trading at a wider discount to its RNAV.
§ Discount to RNAV, a historical perspective - Before Singapore IR was announced, Resorts World shares traded at a smaller 10-15% discount to RNAV but this discount has widened to over 30% since the 2006 announcement.
§ Ignoring the cash piles - The sizable RNAV discount is primarily because investors have been discounting the company's cash reserves. Given the difficulty in assessing the real impact of Singapore IR, and the lack of any plan to return cash to shareholders, investors are unlikely to accord any value to estimated cash reserves of US$1.6bil by year-end.
§ New target price at RM2.37 - Previously we derived our target price by giving full value to the Resorts World DCF-derived RNAV without any discount. Rather than arbitrarily attaching a discount, we instead remove the cash component from its RNAV since we view the market has not been giving any value to its cash reserves. Our new DCF-based target price is RM2.37.
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