Resorts World: Cheapest casino in Asia ex-cash: BUY

Resorts World
RNB MK, BUY, CP 2.86, TP 3.51, Mkt cap: 4,837m, ADV: 14.0m


* We resume coverage of RNB with a BUY and SoTP-based TP of
MYR3.51/share, offering 23% upside.

* Earnings will be resilient after two Singapore IRs open in 4Q09-1Q10 -
85% of casino customers are Malaysian.

* A cash hoard of MYR5.4b in 2009, ex-cash FY09 and FY10 P/Es of 9.6x
and 8.3x - Asia's cheapest casino.


2009E: P/E 13.9, P/B 1.8, ROE 13.9, Yld 1.9
2010E: P/E 13.3, P/B 1.7, ROE 13.2, Yld 2.1

Resorts World: Strong 1Q09 results despite tough conditions

· Core net profit 27% of our FY forecast: Resorts World reported 1Q09 core net profit of M$306MM, up 3% Y/Y but down 22% Q/Q. 1Q09 core net profit also represents 27% of our full year forecast of M$1B and 24% of consensus earnings of M$1.25B. We view the results as in line as earnings in subsequent quarters may be impacted by higher promotional costs, especially leading up to the opening of the Singapore casinos. Note that the company also recognized an impairment loss of M$30.4MM during the quarter for its investment in Star Cruises.

· Relatively strong revenue numbers, but margins lower due to promotional activity: Revenue for 1Q09 grew 8% Y/Y. Hotel occupancy rates were up to 87% in 1Q09 vs. 86% in 1Q08 while average room rates grew 8% (increasing from M$65 to M$70). Visitor arrivals also held up pretty well, declining only 2% in 1Q09 to 4.6MM visitors from 4.7MM visitors in 1Q08 despite weaker economic conditions. On the VIP business front, the company managed to maintain its VIP contribution to casino revenue at 30% despite the slightly poorer luck factor. Note that the company has yet to see significant impact from the swine flu. Margins, however, were impacted due to the higher promotional activity.

· Reiterate our OW, Dec-09 PT of M$3.20. We believe that any expected short-term slowdown in business environment due to the economic crisis as well as health scare has already been factored into our earnings estimates. We are already forecasting a 22% fall in casino revenues for FY09E vs the fall of 15% during the Asian Financial Crisis. Our PT of M$3.20 also attributes a 40% discount to its cash pile and 11% COE for its Malaysian business. The company’s foreign shareholding stands at 31% as at March 2009, a slight decline from 33% as at end last year.

· Please see inside for key takeaways from the J.P. Morgan Live conference call with Resorts World.

Resorts World (RWBW.KL): Downgrade to Sell: Entering into Uncharted Territory

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.

●名勝世界 Resort : Overweight

評級：超越大市

目標價：RM2.95

自去年11月宣佈以6900萬美元（2億4978萬令吉）全面收購美國公司Bromet和Digital Tree股權計劃以來，名勝世界股價在外資拋壓下迄今已下挫18%，外資持股比重從2008年首9個月的40%跌至去年12月杪的33%。

儘管未獲得本地基金支撐，但名勝世界外資持股料不會進一步大跌，主要是現有8至9倍本益比和1.1至1.2倍每股股價淨值比（P/BV）無法反映其穩定商業模式、以及高達45億現金儲備可能開展的併購計劃利好。未來股價催化因素包括穩定博彩業務、強勁財政、高股息以及潛在區域併購活動。

Resorts World - BUY - 29 May 2008

Resorts World - 1Q08 within expectations (Results Note)



Price: RM3.20

Target Price: RM4.84

Recommendation: BUY



· 1QFY08 revenue of RM1.1b was in line with our expectations and market's while net profit at RM297.4m was 21.3% of our forecast and 22.3% of street's. Stronger performance was driven mainly by higher visitor arrivals.

· QoQ, 1Q08 revenue and EBITDA declined a seasonal 4.3% and 6.8% respectively which is in line with expectations.

· YoY, 1Q08 revenue grew 2.6% while EBITDA rose 6.4% to RM439.0m owning to strong highlands operation. EBITDA margin rose 14 basis points to 40.2% (1Q07: 38.8%) on improved economies of scale. Excluding exceptionals, pre-tax jumped 45.3% due to: a) non-consolidation of StarCruises' losses after becoming a non-associate following its disposal with a mere 19.6% stake from 33.9% in 3Q07, b) higher highland visitorships; and c) rising interest income (+51.3% yoy) on growing cash pile.

· Cash pile rose to c.RM3.7b post sale of Genting International shares. Undemanding capex for 2008 estimated at RM600-700m for upgrading of facilities and renovation could see cash coffer increase further to RM4.0b, or RM0.67/share by year end. Rising cash hoard increases appeal of Resorts World as a possible privatisation target or earmarked as the group's new vehicle to spearhead regional expansion.

· Highlands' operation expected to remain resilient, underpinned by strong visitor arrivals with locals accounting for circa 85% of total visitor arrivals. While there could be some dampener to consumption in the near term on the back of rising costs, impact if any is likely to be temporary. We continue to maintain a +4% growth in total visitor arrivals. Resorts' resilience is a stark contrast to global casino operators, including Sands, MGM Mirage and Wynn which saw 1Q profit dipping due to the prevailing global economic slowdown, heightened competition and rising operating costs in both Vegas and Macau.

· Maintain forecasts and reiterate BUY with an unchanged target price of RM4.84. Trading at FY08 PER of only 13.4x, a huge 60% discount to regional peers' PER of 33x, Resorts is truly one of the most undervalued gaming stocks.







KENANGA INVESTMENT BANK BERHAD (15678-H)

Resorts World - Mainly in line

Resorts World - Mainly in line (Results Note)
Price: RM3.80
Target Price: RM4.84
Recommendation: BUY


· FY07 revenue of RM4.4b was in line with our expectation and street's. Core net profit at RM1203.4m was however marginally lower at 5.5% and 8.9% below our expectation and street's consensus respectively, due to marginally higher effective taxes and finance cost.

· QoQ revenue was up 2.3% on higher visitor arrivals while EBITDA margin dipped 1 percentage point to 41.3% suggesting perhaps higher promotional expenses and/or lower luck factor. Pre-tax was lower by 42.9% as exceptional including StarCruises' disposal and dilution (RM354.8m) was recognised in the preceding quarter. Normalised, pretax was 6.7% higher sequentially.

· YoY, FY07 revenue and EBITDA recorded healthy double digit growth of 14.3% and 12.1% respectively. Stronger headline numbers were driven by higher visitorships, growth in both grind and VIP markets and higher interest income (+173.1%) on rising cash balance to RM3b.

· Final dividend of 3.6 sen bringing full year dividend to 6.48 sen (2006 : 5.4sen). Payout of 24% is a tad disappointing given expected cash hoard of RM3.5b post sale of Genting International to be completed in the near future. Rising cash hoard should spur speculation of further acquisitions or the latest being the privatisation of Resorts World which we do not discount.

· Prospect remain robust for FY08 underpinned by robust private consumption growth augmented by 9MP spending, growing patronage with the extension of VMY, active room yield management and aggressive marketing efforts to attract the right customers. We are confident on the growth of Resorts' visitor patronage and maintain our net profit forecast of RM1.4b and RM1.5b for FY08 and FY09 respectively.

· BUY maintained with an unchanged sum of parts valuation at RM4.84. Resorts is trading at one year forward PER of only 15.9x, a huge 39% discount to the regional peer's forward PER of 26x. Expansion into the regional gaming market could be a strong rerating catalyst for share price.









KENANGA INVESTMENT BANK BERHAD (15678-H)

Research Department