Raising Hopes For A Genting Win

Raising Hopes For A Genting Win

James S

THIS year could see another significant milestone in the Genting group history if the company’s bet on landing one of the two new Singapore casino licences pays off.

Investors and analysts are already positioning themselves, judging by the firm stock price of Genting Bhd (see chart), and the many Buy calls by analysts on the stock, which was traded at RM20.20 at the time of writing.

Indeed, many reckon that Genting’s chances have certainly gotten better after the Singapore Government announced that only five (Genting being one of them) out of an initial 12 groups had submitted disclosure documents for formal checks ahead of the deadline for the first licence.

What is rousing the advocates is that Singapore could just be one of the major breakthroughs the group is seeking, as it is also eyeing the opening of new casino markets in Britain, Macau, Japan and Thailand, among others.

Singapore race narrowing down

It was reported that the five groups that came through the probity check deadline were Harrah’s Entertainment-Keppel Land, Las Vegas Sands, MGM Grand-CapitaLand, Genting International Ltd (GIL) and Melco International and Publishing and Broadcasting.

GIL, which is 64%-owned by Genting, is likely to hog the limelight more in the future as it appears to be the vehicle chosen by the Genting group for its overseas casino diversification, instead of its 58%-owned local casino operator, Resorts World.

OSK Research Sdn Bhd in a recent report says this is evident from the many acquisitions made by GIL in the last two years. Most of these were for British-based gaming players, where GIL now has a 20.2% stake in Stanley Leisure Plc, 29.8% in London Clubs International Plc and 50% in Maxims Casino.

Probably to underscore its commitment to Singapore and increase its chances of being selected, GIL is also listed on the main board of the Singapore Stock Exchange.

But competition is still keen

Note that the Singapore Government’s proposal is for the winning party to build not just casinos but also an integrated resort on two sites in Singapore, at Marina Bay and Sentosa Island.

The rationale behind this is apparently Singapore’s desire for the casino operator to promote tourism on the island as well as keep dissent, from groups opposing the casino plan, at bay.

Bidding for the Marina Bay site will close on March 29 and apparently, the winner will be announced in mid-2006.

According to the Singapore Tourism Board, the bid for the second site on Sentosa Island will be launched later in 1Q2006. It will close four months after the Marina Bay tender is awarded. This will allow those not successful in the earlier tender exercise to bid for the Sentosa site.

It is hence not surprising that GIL, together with cruise operator Star Cruises, which is also within the Genting group, has joined forces with Universal Parks and Resorts to submit their bids. GIL and Star Cruises had submitted a bid for Marina Bay while another bid together with Universal had been submitted for Sentosa Island.

Still, Genting is up against formidable competitors, with most of them being bigger and more established in the gaming industry worldwide. For the Marina Bay site, the frontrunner appears to be more the other parties like the Harrah’s Entertainment-Keppel Land group, which reportedly wasted no time recently to add on Suntec Singapore to strengthen its bid.

Note that in October, Harrah’s and Keppel Land had already signed a pact with United States-based SMG, the world’s largest marketer and operator of convention centres, to promote the Singapore casino resort as a destination for international conferences.

Better chances for Sentosa Island site

Most analysts reckon that Genting stands a better chance in the Sentosa Island bid. AmResearch Sdn Bhd, in a recent review of Genting’s prospects, says Genting may have the edge with regard to Sentosa given the strength of its foreign partner, Universal, as one of the largest theme park operators in the US.

It reckons that a theme park would be in line with Sentosa Island’s target market of families with its family-oriented activities. In contrast, the Marina Bay site is targeted at the meetings, incentives, conventions and exhibitions (MICE) market, which is linked to Genting’s competitors’ expertise rather than Genting’s.

High development costs, balance sheet will be stretched

AmResearch says whichever party that wins would need to fork out at least S$0.8 billion-S$2.8 billion to construct the casino-cum- integrated resort at any of the two sites.

In ringgit terms, this comes up to a cool RM4.5 billion-RM8.9 billion (S$1:RM2.23). Despite having a massive net cash chest of RM2.2 billion as at end-December 2004, AmResearch says Genting, should it win, would obviously have to raise massive amounts to fund the development.

The research house estimates that from a net cash position, Genting might see its balance sheet stretched to as much as 64% in net gearing, assuming the group takes up RM7 billion in borrowings.

The compensation factor is that the casino resort apparently could be built in stages, allowing casino earnings to finance the remaining development phases.

However, analysts say that under the specifications laid down by Singapore, the resort operator can only apply for a casino licence when at least half of the proposed floor area has been completed and ready to receive visitors and at least half of the committed investment cost has been spent.

How much will a Singapore casino make?

AmResearch believes that one casino resort on the island could potentially generate revenue of S$2.4 billion (RM5.4 billion) and operating profit of S$480 million (RM1.1 billion).

In its calculation, the research houses had assumed the number of visitors to the casino resort at 12 million yearly with an average spending per person of S$200 and an operating profit margin of 20%.

Based on AmResearch’s current FY06 revenue forecast of RM5.6 billion and pretax profit forecast of RM2.3 billion for Genting, one can deduce that winning a casino bid could potentially boost the group’s pretax profit by almost 50%.

Of course, the impact would presumably be less at the net profit level, depending on the shareholding structure between GIL, Star Cruises and Universal. Further, full earnings and cash flow would presumably flow in only in 2009/2010, when the casino resort is completed.

No big deal?

The next question is, what if Genting did not win any of the two Singapore casino bids? Apparently, analysts are unfazed by this as they say Genting remains undervalued even based on current fundamentals.

OSK Research, which has a Buy rating on Genting, points out that Genting’s local casino under listed Resorts World remains as popular as ever and that its other core divisions, namely power and plantations, are expected to remain stable.

It says the expansion of its power business to China and India are potential cash cows that will supplement its core leisure-cum-casino business, which contributes around 50%-60% of the group’s pretax profit.

Foreign stockbroker JP Morgan concurs, saying in an investment note to clients that it remains Overweight on Genting as it believes the main earnings driver will continue to be its casino operations in Genting Highlands.

JP Morgan says it expects the group to record a three-year earnings CAGR (compounded annual growth rate) of 12% going forward, driven by increased room capacity, improved infrastructure, and better and more optimal locations.

More opportunities ahead

JP Morgan says Genting’s investment in casinos overseas is certainly going to be a long-term catalyst for the group.

Affin Research in its 2006 Outlook report says there are now many more investment opportunities overseas for the casino division as even major countries like Japan, South Korea and Taiwan are looking to open the sector.

It rates Genting as one of its top picks, saying the conglomerate is cheap at just 11.9x FY06 earnings, with an EBITDA margin of 49% and a ROE of 12%. However, market openings could certainly be a double-edged sword.

JP Morgan cautions that the longer-term risks to the group include heightened competition for its local casino business from new regional casinos opening up in Macau, Singapore and even Thailand.

It is thus not a surprise that Genting is now increasingly flexing its muscles overseas. To its luck, investors appear to be putting their bet on the house for now.

Copyright 2006

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