Contrary to the title, we believe that investing should never be taken as a gamble and decisions should be based on sound, non-speculative strategies.
“Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas.”– Paul Samuelson
A Quick Introduction
Ever heard of Resorts World Sentosa?
Well, if not, you have definitely seen it before.
Genting Singapore Ltd (SGX: G13) is the operator of the integrated resort, Resorts World Sentosa (RWS).
RWS features six uniquely themed hotels with approximately 1,600 hotel rooms, a casino, S.E.A. Aquarium™, Adventure Cove Waterpark™, Universal Studios Singapore™ and many other attractions.
At the current price of S$0.91 (at the time of writing), Genting Singapore’s shares are trading at 31% below its 52-week high price of S$1.32. It has drawn the concerns of shareholders and sparked interests among opportunists.
This raises the million-dollar question: Should you invest in Genting Singapore now?
That is what we will seek to answer for you today. Here’s how we intend to analyse whether Genting Singapore is a “Buy” or a “No Buy“.
- Dividend Investing: The Growth Dividend Strategy
- Step 1: What is Genting Singapore’s Gross Profitability?
- Step 2: Determine the attractiveness of Dividend Yield
- Step 3: Determine the sustainability of Dividends
- To buy or not to buy?
- The Potential Upside!
The Dividend Growth Strategy
In this article, we will use Dr Wealth’s Dividend Growth Strategy to evaluate Genting Singapore.
This is going to be a very quantitative approach.
We believe that one should perform quantitative analysis on a stock before dwelling into the qualitative.
That way, we can ignore any emotional biases which can do you harm.
Storytelling is dangerous and misleading, it is often used to confirm our biases which may hurt our investment returns.
In a nutshell, this strategy can be executed in just 3 simple steps:
- Determine Genting Singapore’s Gross Profitability
- Determine Attractiveness of Dividend Yield
- Determine the Sustainability of the Dividends
You can read more about the strategy at our Factor-Based Investing Guide.
Let’s dive in!
Step 1: What is Genting Singapore’s Gross Profitability?
What Is Gross Profitability?
This metric has been proven to produce market-beating returns by Robert Novy-Marx.
A profitable and good company is able to use very little assets (very scalable, efficient and less capital expenditure is needed to keep business running) to produce a lot of gross profits (profits after deducting variable costs is the cleanest accounting profit in the income statement).
Step 1A: Determine Gross Profits
Gross Profits can be extracted from the Income Statement of the 2018 Annual Report published by Genting Singapore. The report is easily available on their website.
Thus, Genting Singapore’s Gross Profit for 2018 is $1,153.8M.
However, do note that not all companies’ Annual Report would include Gross Profits. It could thus be extracted from financial data providers such as FactSet or Yahoo Finance.
Gross Profits could also be manually calculated by taking Revenue – Cost of Sales = Gross Profits
Step 1B: Determine Total Assets
Total Assets can be extracted from the Balance Sheet of the Annual Report.
Non-Current Assets [$5,241.5M] + Current Assets [$4,545.7M] = Total Assets [$9,967.2M]
Step 1C: Determine Gross Profitability
Thus, the Gross Profitability:
Gross Profits [$1,153.8M] / Total Assets [$9,967.2M ] = Gross Profitability [11.6%]
G1 represents the bottom 20% of companies with the lowest profitability. G5 represents the top 20% of companies with the highest profitability.
We have ranked all the SGX-listed stocks by their GPA (as calculated above) and Genting Singapore falls in G4 (next 20% by GPA).
According to our strategy’s rules, we invest only if the stock falls into the G5 range.
This means that Genting Singapore does not meet our gross profitability criteria.
However, as one would realize, Genting Singapore’s GPA has been increasing through the years and thus, one might want to keep an eye out for next year’s metrics.
This would actually make the watchlist for us and we would keep an eye out for it jumping to the G5 category.
Step 2: How attractive is Genting Singapore’s dividend yield?
You can determine the historical dividend yield by taking:
Dividend Distributed in previous year [$0.035] / Current Trading Price [$0.91] = Historical Dividend Yield [3.84%]
D1 represents the 20% of companies with the lowest dividends. D5 represents the 20% of companies with the highest dividends.
We ranked all the stocks in SGX by their dividend yield and Genting’s yield is in the D4 (next 20% by Dividend yield).
Our rules state that one should ideally purchase stocks that fall in the top 20% (D5) range.
With a yield of 3.84%, it is not as attractive as there are better counters that fall in the top 20% which provide a higher dividend yield.
Step 2A: Is it G5D5 ?
We investigate further only if the stock falls into this category for both profitability and dividend yields paid.
If it does not pass this criterion, we do not bother investigating further into it.
Since Genting Singapore failed to pass this test, we would naturally not move on to investigate further, but let’s go through the exercise to illustrate the process.
Step 3: Determining the sustainability of Genting Singapore’s Dividends
To determine if the dividend distribution of a stock sustainable, it can be analyzed with two simple metrics:
- Payout Ratio
- Average Free Cash Flow Yield
One should always check for the Payout Ratio so as to ensure that the seemingly high yield is not due to a one-off special dividend given that year.
As dividends are given in cash, we check for the Average Free Cash Flow yield to ensure that there is enough cash being generated to fund the distributions every year.
If we draw upon the case of Hyflux, it was due to the lack of profitability, unsustainable payout ratios and years of negative free cash flow that caused them to default on their 6% perpetual bonds. Read more about that fateful and painful lesson here.
Do note that if the stock fails to meet the G5D5 rule, one should not even consider calculating these additional metrics.
Step 3A: Determine Payout Ratio
We deem that the dividend distribution of a stock sustainable, if the payout ratio is less than 1.
A payout ratio displays how much of the company’s net income is being paid out as dividends
We can see that the payout ratio was more than 1 in 2015 and 2016. Genting Singapore distributed special dividend in those years.
It is very telling that the dividend is likely to drop the following year when a special dividend is announced and the payout ratio is more than 1. Hence, it is important to check this condition and not just rely on the dividend yield alone. One might be tricked by a higher than normal dividend yield.
Hence, it passes the payout ratio criteria.
Step 3B: Determine Average Free Cash Flow
Payout ratio relies on earnings which may not be fully backed by cash.
Moreover dividends are given in cash, we should evaluate if a company can indeed generate cash.
Free Cash Flow = Operating Cash Flow – Capital Expenditure
Free cash flow is the amount of cash available to the management after all operations and fixed costs have been paid for. The management can decide if they want to distribute the cash as dividends or to retain in the company for future uses.
We deem the dividend distribution sustainable if:
Dividend Distributed < Free Cash Flow
However, Free Cash Flow is a very lumpy figure due to irregular capital expenditure.
For example, a bakery might replace their ovens every 5-6 years and thus would spend a hefty sum on new machinery in that specific year.
As such we use the average Free Cash Flow over 5 years to smooth it out as well before comparing to the dividends.
By taking: Average 5 year free cash flow [0.074] / Current Trading Price [$0.91] = Average FCF yield [8.5%]
Genting’s average Free Cash Flow yield is 8.5% which is higher than the dividend yield of 3.84%.
Hence, it passes the average FCF criteria.
Upon crunching the numbers and evaluating them against the criteria, you should know that it is not the finish line. One should go on to evaluate the company qualitatively, today we will elaborate on a select few:
- Business Model and its Moats
- Leadership and Management
- Skin in the game
Looking solely at the Financial Statements to determine whether a company is worth your investment is definitely not enough.
Business Model and its Moats
In the case of Genting Singapore, its competitors would be other companies that specialize in gaming casinos and the running of integrated resorts.
Like a wide moat surrounding a castle, competitive advantage protects the company’s future profits from its potential competitors. The economic moat can consist of:
- Powerful name Branding and consumer loyalty
- Huge economies of scale
- High barriers to entry and Market leader (impenetrable business)
- Special Patent, Technology, Trademark or Formula
While there are only two casinos in Singapore (the other located at Marina Bay Sands), Genting Singapore’s competitors are IRs and Casinos worldwide. That’s because the company’s target customers are tourists. Thus, there is high competition within the industry with other companies such as Caesar’s Entertainment, Wynn Macau and SJM holdings in the global arena.
However, there are high barriers to entry into the industry due to the initial capital outlay. That being said, the threat of new players into the industry is low.
As Genting Singapore is targeting tourists, any other tourist attraction can be considered a viable substitute product to the firm’s attractions. Therefore, one could state that it does not have a big moat.
Leadership and Management
The board of directors and CEO should be well versed in the industry, with sufficient experience in leadership. They should be knowledgeable in the sector’s market, thereby allowing them to adopt business strategies tailor-made for the industry and have sufficient foresight on the expansion of the sector.
The group’s chairman, Tan Sri Lim, joined the company 43 years ago and he has been the Chairman of the Company since 1 November 1993. He is responsible for formulating the Group’s business strategies and policies. This proves that he has sufficient experience and foresight to guide the group towards greener pastures. This has been proven through his ability to navigate the group through modern day dynamics while still achieving commendable financial results. Revenues grew 6% year-on-year to S$2.54 billion, while net profits grew 28% to S$755.39 million in 2018.
Skin in the Game : Is management aligned with shareholder interest?
If the Chairman or the CEO of a company owns more than 50% of shares in the company, but not more than 70%, their interests are more likely to be more aligned with the shareholders.
That is because they are unlikely to take actions to harm their own wealth and would look towards improving the prospects of the company
In Genting Singapore’s case, the ownership disclosed by the annual report looks like this:
As can be seen, insiders of the company owned a majority of the shareholder-ship. Therefore, it proves that the management have skin in the game.
To buy or not to buy ?
The strategy we adopt places focus on quantitative analysis before dwelling into the qualitative side.
The main reason we are not interested in buying is because the company didn’t pass the gross profitability metric and its dividend yield is not attractive enough. Even if it meets the Payout ratio and Average Free Cash Flow criterion or that certain qualitative factors are met.
So we would not be investing in Genting Singapore, for now.
The Potential Upside of Genting Singapore
In this article, we have used the Growth Dividend strategy to quantitatively analyse this stock. However, as we religiously stick to our investing rules, Genting Singapore fails to meet the pre-set requirements.
This definitely does not mean that one should casually sweep the stock under the carpet and forget all about it.
In fact, it is worth to shortlist and wait for better prospects to enter if it meets the criterion one day.
This stand could be actualized in the coming years as Genting Singapore would be investing S$4.5 billion each over the next few years to invigorate the local tourism scene.
Genting Singapore added in a press release that the gross floor area of RWS is expected to increase by 50% as a result of this expansion.
The company could also potentially expand into the Japanese market.
Back in 2016, the Japanese government legalised casinos, which set the scene for IRs to be built. After years of anticipation, a formal request-for-proposal (RFP) is expected in late 2019, which means that the winners of the IR license will be announced in 2020. The company will bid for licenses in all three Japanese cities that have expressed interest in having an IR.
Should Genting manage to attain the aforementioned licenses, this would diversify the company’s portfolio, allowing them to capitalize on Japan’s attractive tourism scene.
Maybe then, Genting Singapore’s gross profitability would increase to a G5 ranking with a more attractive sustainable dividend payout (D5). We would once again use the Growth Dividend strategy to re-evaluate the company when the time comes.
The purpose of this article is to share our investment approach to capture the Profitability Factor on dividend paying stocks. It is not meant as a recommendation to buy or sell this stock.
To learn more about the GPAD strategy, along with a suite of other investing strategies, we hold regular introductory courses to share our structured investing course called “Intelligent Investing Immersive Programme”. You can get a free seat here.
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