Genting: Too big to ignore

Too big to ignore:
Following the opening of Resorts World at Sentosa (RWS), Genting Bhd will become one of the largest casino operators in Asia, and will offer investors a unique exposure to the still-fragmented Southeast Asian gaming market. Note that we expect casino earnings to contribute 80% of Genting Bhd’s revenue by FY11, while the overall group’s strong balance sheet position and extensive experience could position Genting to benefit from further liberalization in the region. Moreover, we think Genting Bhd is also the safest proxy to the Genting Group given the Lim family’s direct 43% stake in the company. Hence, interests of minority shareholders are aligned with those of the family.

We raise our PT to M$8.50, from M$6 previously. We roll forward our timeframe to June 2010 and raise our PT to M$8.50 to reflect our new PTs for Genting Singapore (S$1.20, initiated separately), Genting Malaysia (raised to M$3.50 from M$3.20), and Genting Plantations (raised to M$6.70 from M$5.30). Note that we have also revised our FY10E and FY11E earnings upwards by 3% to reflect our new Genting Singapore and Genting Plantations forecasts.

We expect the share price discount to narrow to SOTP: In arriving at M$8.50, we also narrow our SOTP discount to 15% from 20% previously (the discount has narrowed from 48% in mid-March to 24% currently). In the run-up to RWS opening, we believe that a further narrowing should take place as it should put Genting Bhd at the forefront of the Asian gaming market. A re-rating of Genting Singapore should be a key driver for Genting Bhd’s share price as Genting Singapore now makes up 40% of Genting’s RNAV. Key risks are a slower-than-expected recovery in casino markets and prolonged health scares.

Genting - Opening of Marina Bay Sands Delayed - BUY

Genting - Opening of Marina Bay Sands Delayed (Company Update)

Price: RM5.70
Target Price: RM6.68
Recommendation: BUY

· Marina Bay Sands delays opening. Sands’ chairman Sheldon Adelson announced that the opening of Marina Bay Sands will be delayed to early 2010 from the original end 2009 dateline. This is not a surprise as the project has been behind schedule for several months due to shortages of labour and building material especially sand and steel.

· Meanwhile, Resorts World@Sentosa has reiterated in various analyst and press briefings that it is on track for soft opening by 1Q2010. The opening features will include Universal Studios, casino and four hotels. Though the official opening date has yet to be confirmed, management guided that group will have a clearer idea of the opening date come 3Q09.

· RWS to open earlier than Marina Bay Sands? Subsequent to the project delay in Marina Bay, we believe that RWS is likely to gear up construction works to open before Sands in 2010. As of 31 Mac 09, RWS has awarded c.S$4.67b works out of the S$6.59b project costs. Installation of various fun equipments in Universal Studios has begun while testing and commissioning is scheduled to begin in Oct 2009.

· First mover advantage for RWS should it be the first to open. The opening of the first Integrated Resorts (IR) in Singapore will definitely be a major event of the year and is expected to draw large domestic and foreign visitors on novelty effect. In addition, the first IR is also poised to lock-in more casino patrons as seasoned punters are likely to sign up for the casino annual passes which cost S$2000 as opposed to S$100 fees on a per entry basis.

· Genting’s share price is expected to be buoyed by the potential opening of RWS as the first Singapore IR. Keeping our earnings forecast as we reaffirm our BUY recommendation on Genting with unchanged target price of RM6.68. Though the opening of RWS is more likely to benefit Genting’s share price, we opine that investors should not ignore Genting Malaysia (formerly Resorts) which is eyeing for M&A opportunities in distressed casino assets given its huge warchest of RM4.85b. Reiterate BUY on Genting Malaysia with target price of RM3.50.

Lims sell 8.8% of Genting S’pore

Exercise raises RM1.47bil for the family

PETALING JAYA: Family trusts of the late Tan Sri Lim Goh Tong placed out their entire direct stake of 853.88 million shares or 8.8% of Genting Singapore Plc at 72 cents a share yesterday.

That raised S$615mil or RM1.47bil cash for the family. Following the sale of their direct stake, the Lim family’s interest in Genting Singapore is held through Genting Bhd which owns a direct stake of 54.4% of the Singapore company.

In an announcement to the Singapore Exchange (SGX) yesterday, Genting Singapore said Golden Hope Ltd and Lakewood Sdn Bhd, both ultimately held by discretionary trusts established for the benefit of certain members of the family of the late Tan Sri Lim, sold the shares at a 9.4% discount to the stock’s volume-weighted average price over the last 10 days.

Genting Singapore had a market capitalisation of S$8.5bil and it is developing Resorts World at Sentosa in Singapore. Its unit, Genting UK, is the largest casino operator in the UK.

The divestment of the direct stakes of Golden Hope and Lakewood simplifies the shareholding, and broadens the institutional shareholding base of Genting Singapore, the company said.

On the SGX, Genting Singapore fell 15.5 cents or 18% to 71 cents yesterday, 1 cent below the placement price. It is not unusual for a stock to drop when there is a placement of its shares.

It is a good price for the family to sell the Genting Singapore shares which are at their highest price in over two years. Furthermore, the price had doubled from this year’s low of 41.5 cents in February to a high of 88.5 cents on Monday.

There is also speculation the Lims raised the cash in an effort to purchase MGM Mirage’s 50% stake in MGM Grand Macau, a joint venture with Pansy Ho, daughter of Stanley Ho, one of Macau’s biggest casino operators.

MGM Mirage was told by New Jersey gaming regulators last week that its partner in Macau was unsuitable and it should “disengage” itself from that partner.

Stanley Ho had made an initial investment in MGM Grand Macau, and he was suspected of ties with organised crime, which he had denied.

It may be difficult for Genting Singapore to acquire that stake in Macau as the company was questioned by Singaporean authorities of a proposed joint venture with Stanley Ho when it bid for the integrated resort (IR) project in Singapore. Genting Singapore pulled out of that joint venture before it secured the IR project.

For that reason, it was speculated the Lim family raised cash to directly bid for MGM Grand Macau instead of through Genting Singapore.

Genting: A laggard play? - ALERT

· Genting Singapore’s share price has rerated almost back to its peak post winning Singapore IR in early 2007. Genting Singapore’s share price increased 117% since the bottom of the market in early March 2009 to S$0.89 yesterday. This is only 9% below its peak post the company winning its Singapore casino license.

· Genting Bhd’s share price, however, has lagged. Despite the 70% increase in share price since the bottom of the market, Genting Bhd is still trading at a 35% discount to its RNAV (calculated based on the current market prices of its listed subsidiaries i.e. Resorts World, Genting Singapore and Asiatic). The discount of 35% is steep vs. early 2007 post its winning of Singapore IR where we saw Genting Bhd’s share price trading at RNAV.

· We remain bullish on both Genting Bhd and Resorts World as we still see upside potential to our PTs. Our Dec-09 PT for Genting Bhd of M$6 is based on a 20% discount to SOTP (factored in PT of M$3.20 for Resorts, M$4.40 for Asiatic and S$0.61 for Genting Singapore). Marking to market its stake in Genting Singapore will add another M$0.94 to RNAV and M$0.75 to price target. Our Dec-09 PT for Resorts World of M$3.20 has factored in almost 40% discount to its excess cash position as well as a COE of 11% to its DCF of Malaysian operations. Incidentally, the market cap of Genting Singapore is now bigger than Resorts World. Note that Resorts World makes in excess of M$1B net profit a year while Genting Singapore has yet to begin its Singapore operations.

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.

Genting - BUY - 30 May 2008

Genting - 1Q08 in line (Results Note)



Price: RM5.85

Target Price: RM9.90

Recommendation: BUY



· 1QFY08 revenue of RM2.2b was in line while core net profit of RM439.4m was 27.8% of our forecast and 26.6% of street's consensus. All major divisions registered positive growth except leisure which was dragged by slower UK gaming operation.

· QoQ, group revenue and EBITDA slid 3.8% and 1.8% respectively on seasonality as earnings for both Resorts and Asiatic are usually slower in first half before peaking in the second half.

· YoY, 1Q08 revenue increased 6.6% but normalised pretax jumped 31.8%, underpinned by: a) higher plantation contribution (+131.0% yoy) on buoyant CPO price; b) increased power contribution (+6.7% yoy) courtesy to the tariff hike for Meizhou Wan plant; and c) absence of associate losses following Resort's disposal of StarCruises with a mere 19.6% stake. Pretax from leisure however fell 8.8% on the back of a challenging operating environment in UK which were affected by higher gaming duty and lower patronage as a result of the smoking ban.

· No confirmation on the speculated power asset sales but we believe this could be another strategic move for the group to unlock value. We conservatively estimate group's powers plants to be worth at least RM3b based on DCF valuation (WACC=12.0%). Net cash should increase to RM12b or RM3.20/share should the sale crystalised.

· Maintain forecasts and BUY recommendation with an unchanged target price of RM9.90. Genting is currently trading at an undemanding FY08 PER of 13.7x versus regional average of 33x, a huge 42% discount.





KENANGA INVESTMENT BANK BERHAD (15678-H)

Genting - BUY - 29 Feb 2008

Genting - In line (Results Note)
Price: RM6.85
Target Price: RM9.90
Recommendation: BUY


· FY07 revenue at RM8.5b was within both our expectation and market's. Core net profit of RM1,597.7m was however 4.2% and 6.6% above our forecast and street's estimates respectively. Better performance was driven by leisure & hospitality, plantation and power divisions which posted strong double-digit topline growth.

· QoQ, revenue rose 1.2% but EBITDA slid 0.9% due to lower EBIT contribution from other minor divisions mitigated by higher contribution from plantation and O&G division. Plantation and O&G division recorded strongest EBIT growth of 17.0% and 22.2% respectively on the back of rising CPO and oil price. EBIT for leisure and hospitality division however contracted marginally by 1%, reflecting the challenging operating environment in UK.

· YoY, FY07 revenue and EBITDA rose 32.2% and 11.6% respectively, underpinned by stronger highlands performance, buoyant CPO price and full year impact from Meizhou Wan power plant which contributed only 7 months in FY06. Profit contribution from O&G was lower due to higher cost incurred. Similiarly, property and other divisions also registered lower profit as activities in these divisions slowed down. Normalised pre-tax profit still grew a remarkable 17.9% underpinned by higher interest income (+30.9) and lower associate losses after disposal of StarCruises.

· Final dividend of 4.3 sen proposed bringing total DPS of 37sen including a special 30 sen in memory of the late Tan Sri Lim Goh Tong. This translates into a yield of 5.5%.

· Maintain FY08 forecast but lower FY09 net profit projection by 7.1% to account for higher interest cost associated with the construction of Sentosa Integrated Resorts in Singapore. BUY recommendation maintain with an unchanged target price of RM9.90. Current weakness presents good buying opportunity as it trades at an undemanding 16.1x FY08 PER versus regional average of 26x, a 38% discount.

KENANGA INVESTMENT BANK BERHAD (15678-H)
Research Department