Genting is Undervalued: Short Term Pain, Long Term Gain

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Message from the Editor: We have previously covered Genting under our article here. Our analysis according to our investing criteria for growth stocks was that it was too expensive to be considered.

We felt that while Genting has reasonable growth, the price was just too expensive. We wanted greater focus on stocks which were cheap that exhibited the growth stock characteristics which has proven time and time again to be superior.

Having said that, not all investment styles are similar. TheBearProwl offers an alternative take here and believes Genting is a good growth stock.

One of the reasons I am still going ahead to publish this is that I believe a more nuanced approach to investing helps all of us readers see things from different points of view. Note that I am not saying you should adopt another person’s point of view wholesale without critical thought.

What I am saying is that if you are better able to appreciate and understand more points of views, your understanding of the investment world becomes much more nuanced and sharp. You understand better WHY you stick to how you invest and HOW you should go about it as well as how others go about.

Critical to the learning of all investors is that you must practice humility and constantly destroy your own most cherished investment ideas and strategies – for only in seeking its weakness, and your own weaknesses, can you truly become stronger and become more unassailable.

Develop your skills. Sharpen your thinking. Challenge your reasonings. Grow. Become wealthy. Help others.

Enjoy.

#1 – Genting Background, A Good Business

Image result for genting singapore

Genting Singapore is committing to an investment of some $4.5 billion for the expansion of the integrated resort (IR) at Resorts World Sentosa (RWS), which will see the property increase its gross floor area by approximately 50%.

In view of the substantial investment and to provide business certainty, the government has agreed to extend the exclusivity period for the two casinos at RWS and Marina Bay Sands to end-2030. Authorities add that no other casinos will be introduced during this period.

As part of this expansion, taxes on revenue (gaming taxes) will be increased. RWS will undertake the expansion of the IR over an expected period of five (5) years.

This will see the existing IR property expanded with approximately 50% of new gross floor area (“GFA”), adding 164,000 square metres of GFA of leisure and entertainment space. Developments and enhancements that will be carried out in connection with the Expansion Development, including the following;

  1. expansion of Universal Studios Singapore, with two (2) new highly themed and immersive environments – Minion Park and Super Nintendo World;
  2. expansion of the S.E.A. Aquarium to be re-branded as “Singapore Oceanarium”;
  3. conversion of the Resorts World Theatre into a new Adventure Dining Playhouse;
  4. expansion of in-resort accommodation with up to 1,100 more hotel rooms at a new waterfront lifestyle complex and within the central zone of Resorts World Sentosa (“RWS”);
  5. an enhanced waterfront promenade to be lined with restaurants and retail outlets, and a spectacular public attraction;
  6. expansion of Meetings, Incentives, Conferences and Exhibitions (MICE) facilities which will bring in more events into Singapore; and
  7. development of a driverless transport system (“DTS”) which will enhance last-mile connectivity to bring greater footfall to RWS and the rest of Sentosa Island.

GENS SP also intends to bid for 1 of 3 available casino licenses in Japan, it is likely that there will be at least 6 competitors including Genting of which 4 are from the US and 2 from Asia.

The process will begin in 2H19 and the winners for the bid will be announced in late 2020/early 2021. As the process has not started, it is not clear yet of the number of bidders for each location or the total number of competitors that will choose to enter the Japan market. The cost of the Japan IR ranges and an approximation provided is US$10b.

#2 – Genting Financials Are Solid

In FY18, Genting Singapore recorded revenues of $2.5b, Earnings Before Interest, Taxes, Depreciation, and Amortization) EBITDA of $1.3b and a net profit of $0.9b.

The net profit translates into an earnings per share(eps) of 6.27cents, of which 3.5cents was distributed as dividends. This is a payout ratio of 60% of eps.

Since the opening of the Singapore Integrated Resort in 2010, Genting Singapore has been able to repay debt $2.8b out of $3.6b of debt and redeemed all $2.3b of perpetual bonds leading to a current cash position of $4.3b and debt position of $0.8b (net cash of $3.5b).

The Company has also distributed 15.5cents of dividend since FY2012.

Genting Singapore has an equity base of $7.8b backed by $3.5b of cash (net), this translates into a NAV of $0.646 and a net cash/share position of $0.29.

The Company currently generates Operating Cash Flow(OCF) of +$1.2billion, a dividend of -$0.42b and Capital Expenditures(CapEx) of -$0.1b annually. This means the dividend payout ratio is 38% of Free Cash Flow.

#3 – Why Are We Investing?

We have chosen to focus on the financials aspect as we are confident of the commercial aspects surrounding Genting’s bid (which is the whole basis of this report).

(i) Genting has the expertise, background, and track record

The IR segment is the strong selling point of Genting which is a key catalyst for Genting’s bid in Japan. The MICE segment has typically been a weak point of Genting, with SG IR2.0, Genting will have the opportunity to showcase its skillset to the world and may also be a catalyst aiding Genting’s bid in Japan

Genting has the proven expertise to build and manage casinos, integrated resorts and essentially mini townships due to the location of Genting Malaysia and Singapore.

(ii) Genting can fulfill funding requirements without much issue

We are not concerned about the funding options for the Japan IR as Genting Singapore currently has a net cash position of S$3.5b.

The Japan IR may cost up to USD$10b (S$13.5b), with the additional CapEx for Resort World Sentosa of S$4.5b, we are looking at a total CapEX of S$18b.

Genting generates FCF after dividend of S$0.8b annually, this is about $6b in 7 years, factoring in for some growth and inflation.

The Japan bid can be funded by up to 70% in borrowings which is S$9.5b, we think Genting will look to maximise. This is due to the low-interest-rate environment in Japan and also natural asset/liability hedging of the currency.

With the reasons mentioned, it is likely Genting will try and secure a bullet loan with minimal payment at the early stage similar to the funding structure used for RWS.

Genting may also look to maintain a higher leverage ratio for the Japan entity. On this note, we like good and cheap leverage, which is facilitated under the current permanently low-interest rates from Japan.

(iii) Sustainability of dividends, supporting share price

Securing debt funding will allow Genting to maintain or not reduce their dividend payout significantly.

There is withholding tax on dividends in Japan and also thin capitalisation allowance rules which is why we think Genting will look to try and keep up a certain level of leverage in Japan while meeting dividend requirements via free cash flow generated from Singapore.

We think Genting Singapore will meet any equity funding gaps via a perpetual/convertible instruments from Genting Malaysia to the Japan entity at an interest rate that will benefit the Malaysian holding entity, this will allow Genting Malaysia to extract profits directly and also avoid withholding tax on dividends.

(iii) Returns on investment

The ROE for RWS is about S$1B which is approximately an ROE of 14%.

We are looking at a steady-state post-debt repayment ROE of 13% for the Japan IR project. This translates into S$1.7b.

For the Resort World Sentosa expansion, we have applied a 12% ROE on the expansion, this will translate into an incremental S$0.5billion of profit and a total steady-state post debt repayment profit of S$1.5b for the entire Resort World Sentosa Integrated Resort.

With an estimated total net profit of $3.2b, with the current share capital, the earnings per share will be 24c/share. An implied Price over Earnings ratio of 12-15 will project a share price of S$2.88-S$3.60. A sustainable dividend of 50%-65% of eps will also support a dividend yield of 4% at the projected price range

Do note that if Genting chooses to maintain some form of leverage as a stable capital structure, it will be with the view of further expansion or higher dividend payout.

#4 – Major Risk Factors

(i) Not winning a single casino license

If Genting does not win a single casino license in Japan, this will significantly impact their growth trajectory. Whilst Genting may bid for other casinos, the timeline will be different.
This does not impact the Singapore growth expansion story. As such we have provided an intrinsic value below to account for this risk factor

(ii) Global shift in tourism trends in Singapore & Japan

There have been declines in FY19 casino revenue in Singapore and Macau, especially in the VIP segment due to the soft economic situation, political environment and also currency restrictions in certain key markets. While this does not impact the long term vision of the investment, this will have a near term impact on share performance.

(iii) Reduction of ROE as a result of regulatory interventions

Regulatory interventions in the form of higher taxation or capital expenditure commitment may significantly impact the ROE and growth trajectory of the company. Delays in issuance of the IR license in Japan will also impact the timeline of the ROI.

#5 – Conclusion

With an impending slowdown in the economy, We think an opportunity may surface to bottom fish a stock that has already underperformed the broader straits times index and global peers. The underperformance gap will continue until the bottom of the economic cycle or when the results of the Japan IR bids are announced in late 2020.

Genting Singapore has a clear and achievable long term growth road map which is something that we do not easily see in other companies. Risk factors are mainly macro in nature which enables better visibility. Share price catalysts are also crystal clear.

With the long gestation period should the Japan bid be successful, we think one can be patient in initiating the investment of this stock.

  • Entry price: S$0.65-0.75
  • Projected 2025 intrinsic value: S$3.00, Total return inclusive of dividends: 530%
  • Shorter-term intrinsic value assuming unsuccessful Japan IR bid: S$1.35

Editor’s Notes: In brief, TheBearProwl is long(buying with the belief that it goes up, as opposed to shorting, which is selling on the belief it goes down) on Genting. Off the top of my mind, I feel this has been a valuable sharing. Particularly on how TheBearProwl has explained how Genting Singapore intends to extract profits and hedge currency risks which are all valid fears investors have. Further, they have provided clear catalysts and fallback scenarios in case the IR bid does not go through.

I would here recommend some homework and thoughts for readers at home:

  • How will a protracted liquidity crunch brought on by a Global Financial Crisis/ Recession affect casino businesses?
  • Will a protracted trade war and can worsening Sino-Japanese conflicts affect casino businesses and IR Bids there given strong Chinese nationalist sentiments? Chinese buyers have openly boycotted brands for going against China policy before. How much of the visitors to such casinos are from China, and how much of a risk does it post to Genting Singapore?
  • Can Genting Singapore sustain its IR in Japan if things go south by a margin of 50%? Or will it be a money-losing venture causing a shrinking company value? To do this, read more analyst reports on the total bulk of tourists and casinos/resort visitors and formulate a hypothesis.
  • Also, try to see if moving forward, earning only half of what they earn, if Genting Singapore can maintain operating expenditures in Japan while awaiting a recovery in the global economy – to do this, you will need to guesstimate based on similar cost expenditures per gross floor area for resorts in other countries matched to the currency. This is important since we should plan for the worst.

I feel overall, TheBearProwl could very well be right. Their analysis was thorough and their reasoning sound.

The big unseen here is what happens if the bid goes through and the business fails to operate half as well as we want it to given a global slowdown seems impending. That is why I have set out homework for all of you to think and digest before taking further action.

Caveat Emptor. DYODD.

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