While 4Q11 results could fall short of our expectations, signposts point to better days ahead. Resorts World Sentosa (RWS) has yet to reach its full potential with sufficient accommodation, more complete product offerings and a boost from a step-up in marketing. Expectations have been lowered and we think incremental positives such as junket approvals, new developments on overseas expansion and market-share gains could catalyse the stock. Maintain OUTPERFORM and SOP-based target price.
Yet to unleash its full potential Marketing programmes for RWS will likely be more restrained until its accommodation constraints are relieved and the West Zone is completed, which we expect in 2H. The marketing team will then have more complete products to market. As such, we believe RWS has yet to reach its full potential, with sufficient accommodation, more complete product offerings and a boost from the company‟s marketing efforts. It is arguably difficult to quantify the boost to gaming demand and earnings from these new non-gaming amenities. But even more comprehensive integrated resort offerings should help draw in more visitors, which in turn could translate into higher casino patronage and gaming revenue.
Minimal impact from stricter regulations We gather that Genting Singapore has been
relatively unaffected by the extension of the scope of Casino Control (Advertising) regulations on promotions. Even before the extension, all promotions had to be vetted by the authorities. With the recent measures, there are in fact more certainties on the „dos and don‟ts‟ of promotions.
4Q11 results preview Genting Singapore will be releasing its 4Q11 results on 22 Feb. Non-gaming revenue should be boosted by the launch of new attractions and year-end holiday season. On the flip side, gaming revenue, particularly in the VIP segment, might still be impeded by a lack of accommodation given delays in the opening of Equarius Hotel and the beach villas and Genting Singapore‟s still-cautious lending policy. As such, we flag the risk of a results shortfall. Our current FY11 EBITDA projection of S$1,750m implies a 4Q EBITDA of S$498m.
Better days to come
1. 2011 performance
1.1 Losing grip of the market 2011 was not an easy year for Genting Singapore; it had to grapple with Resorts World Sentosa‟s (RWS) receding market share, stricter casino regulations, economic uncertainties and higher bad-debt provisions, among others. From an estimated 73% share of Singapore‟s gross gaming revenue (GGR) in 2Q10, RWS‟s share retreated to only about 48% in 3Q11 as Marina Bay Sands (MBS) ramped up its operations aggressively. The alleged culprits were:
1) a slow ramp-up of tables and slot machines relative to MBS;
2) a lack of accommodation, particularly for VIPs;
3) its less central location; and
4) its lack of presence in buoyant gaming markets such as Macau which would have provided cross-selling opportunities.
1.2 Share price in 2011 After gaining 68% in 2010 (FSSTI‟s +10%), its share price plunged 31% in 2011 (FSSTI‟s 17% contraction). We think this was a reflection not only of RWS‟s declining market share but also investors‟ worries about the impact of economic instability on gaming demand.
2. OUTLOOK
2.1 Delays in Equarius Hotel and beach villas; accommodation constraints likely to spill in to 1Q
A lack of accommodation has been indentified as one of the impediments to gaming demand. This could persist until the opening of Equarius Hotel (200 rooms) and beach villas (22 units), which has been delayed to 1Q12 from 4Q11. Since an estimated 80-90% of RWS‟s VIP players are foreigners, the addition of rooms/villas should strengthen its ability to wrangle market share from its rival.
Genting Singapore‟s activeness in addressing its accommodation constraints is evident in its recent bid for a hotel site tender in Queensway, a short drive away from RWS. The winner of the tender was Chip Eng Seng Corporation‟s unit, CEL Development. The move was not entirely surprising. We gather that Genting Singapore is working closely with the other hotels in Sentosa and some city hotels to cater to the strong room demand at RWS. RWS currently has four hotels with 1,350 rooms. This is considerably fewer than MBS‟s 2,500 (in three hotel towers).
2.2 Expanding product offerings to increase casino patronage
We were in Universal Studios Singapore (USS) in January to try out the world‟s first Transformers ride. Located in the Sci-Fi city zone, the Transformers ride has received good reviews since its debut in Dec 11. Though not as heart-stopping and jaw-dropping as a regular roller-coaster ride, the four-minute ride was, to us, thrilling and entertaining. It combines a moving vehicle with 3D imagery to put visitors in the middle of a fight between Autobots and Decepticons. The 3D imagery works perfectly well to enhance the movements and reality of the ride, and we found ourselves dodging missiles and objects thrown our way. Queues for the Transformers were short, but we attribute this to the regular working/schooling day. In fact, we found the crowd in the theme park decent for a non-school-holiday afternoon.
Hot on the heels of the launch of Transformers: The Ride was the opening of the “Malaysian Food Street”. With over 20 stalls and 500 seating capacity, RWS‟s latest F&B offering features some of Malaysia‟s favourite street food. These are two recent examples of its expanding non-gaming offerings. RWS has more ammunition in the bag, with the major one being the Marine Life Park which will be the world‟s largest oceanarium. Non-gaming revenue currently accounts for less than 20% of Genting Singapore‟s total, though management hopes to bring this closer to 30% eventually.
It is arguably difficult to quantify the boost to gaming demand and earnings from these new non-gaming amenities. But we believe RWS‟s non-gaming amenities would further complement USS, offering an even more comprehensive integrated-resort experience to its patrons, especially getaway weekenders and tourists. This should help draw in more visitors, which in turn could translate into higher casino patronage and gaming revenue.
2.3 RWS has yet to kick-start its marketing in earnest; yet to unleash full potential
Marketing by RWS is not running at full steam yet. We gather that marketing programmes will likely be more restrained until the West Zone is completed and accommodation constraints have been addressed, which we expect to be sometime in 2H. This makes sense as the marketing team will then have more complete products to market to clients. As such, there are reasonable grounds to believe that RWS has yet to reach its full potential.
Going into 2012, RWS will have one full calendar year (Jan-Dec) of operational track record. While we acknowledge that the market is still new, we think that reading and interpreting seasonal trends should only get easier from here. With a better grasp of seasonality‟s impact on tourist/punter arrivals, we believe both integrated-resort operators should be able to plan their A&P more effectively to cushion seasonally weaker quarters.
2.4 More cautious lending stance could impede near-term VIP gaming volume
We gather that Genting Singapore will remain vigilant on credit lending given the current downbeat economic environment. This could cap its near-term VIP volume. Recall that its provisions for accounts receivables had inched up from S$19m in 2Q to S$57m in 3Q. These provisions, which accounted for 11% of 3Q11‟s VIP GGR, were exceptionally high vs. Genting Singapore‟s historical 4-6% for VIP GGR. Management has not altered its method of providing for receivables, but has only adopted greater caution in view of economic uncertainties.
The high credit provisioning in 3Q11 had undoubtedly affected the quarter‟s core net earnings of S$219m. A more moderate 5% of VIP GGR provisions instead of 11% would have bumped up net earnings by S$26m to S$245m, according to our estimates. A more moderate 5% (of VIP GGR) assumption would imply S$34m of provisions for 4Q11.
2.5 Stricter regulations not seen as a major impediment to gaming operations
The Ministry of Community Development, Youth and Sports and the Casino Regulatory Authority late last year had extended the scope of the Casino Control (Advertising) regulations to cover not only casino advertisements but also promotions i.e. membership drives, rewards and loyalty programmes, lucky draws, contests etc. This was aimed at controlling gambling in the domestic market (which includes Permanent Residents and foreigners working and living in Singapore), on top of the existing entry levy system.
On the surface, the development restricts casino operators‟ flexibility in luring punters and rewarding loyal customers. The mass market would likely be most vulnerable to a lack of promotions or giveaways. This segment currently accounts for an estimated 48% of RWS‟s GGR (52% of MBS‟s). But we gather that Genting Singapore has been rather unaffected so far. Even before the regulatory extension, all planned promotions had to be vetted and approved by the authorities. With the recent extension, there are in fact more certainties on the dos and don‟ts‟ of promotions.
2.6 Overseas expansion a potential source of growth and diversification
Armed with net cash of S$162m (at end-Sep 11) and with ample room to gear up, expansion into new markets has always been possible for Genting Singapore. We view the prospect of yet another lucrative cash cow like RWS as a re-rating catalyst for the stock. Genting Singapore‟s management appeared upbeat on the potential liberalisation of Japan‟s gaming market during its 3Q11 results conference call last year.
A group of lawmakers was reportedly planning to draft a bill that would allow integrated resorts to operate in the country. This came five years after attempts to update Japan‟s strict gambling regulations and allow casino gaming failed. With the Japanese government facing an expensive reconstruction bill, Japan could now be more open to casino gaming. Instead of conventional tax hikes, casino gaming is viewed as an alternative for fiscal revival and job creation.
Still, the casino gaming bill could meet opposition from those who fear the crime that casino gaming brings along. This could mean that casino gaming in Japan, if approved, would be governed by strict regulations, not unlike Singapore. In this case, we think Genting Singapore‟s experience in operating RWS under the hawk eyes of the Singapore government could be a feather in the cap when it comes to bidding for the casino licence.
3. 4Q results could disappoint; earnings cut likely
3.1 VIP volumes could be capped by lack of accommodation and cautious lending Genting Singapore will be releasing its 4QFY11 results next month (22 Feb). Non-gaming revenue should receive a boost from the launch of new attractions such as Transformers: The Ride in Dec 11, Maritime Experiential Museum & Aquarium (MEMA) in Oct 11, and year-end holiday season. We expect visitor arrivals to trend higher than the 9,400 in 3Q12, while hotel occupancy should remain high given the year-end festive season.
On the flip side, gaming revenue, particularly in the VIP segment, might still be impeded by a lack of accommodation given delays in the opening of the high-end Equarius Hotel and beach villas, and Genting Singapore‟s cautious lending policy. As such, we flag the risk of a results shortfall and earnings downgrades. Our current EBITDA projection of S$1,750m for 2011 implies a 4Q EBITDA of S$498m.
3.2 Pre-operating expenses for West Zone might weigh down near-term earnings
Management reiterated during its last conference call that EBITDA margins should hover at 45-50%, which would secure Genting Singapore‟s position as one of the most profitable casino operators in the world. EBITDA margins had been 47% in 3Q11. While the company should have little difficulty in maintaining its EBITDA margins, near-term margins could be affected by pre-operating expenses from the rollout of West Zone. Operating margins should stabilise by 4Q12 or 1Q13.
3.3 Dividends unlikely over the next 1-2 years
We are not expecting dividends in the coming quarters despite our operational cash flow projections of S$1.5bn-1.8bn for the next three years. Apart from bank covenants restricting RWS from paying dividends until certain financial ratios are met, Genting Singapore could be conserving cash for potential investment opportunities. This simply means that dividends would remain out of reach for now.
4. VALUATION AND RECOMMENDATION
4.1 Quiet 1H12; but better days ahead? We are retaining our FY11-13 earnings projections pending the release of 4Q11 results. In view of the current economic headwinds, our estimates may appear aggressive. 4Q results could disappoint since Genting Singapore‟s accommodation constraints and still-cautious credit lending could crimp VIP gaming demand. Over 95% of VIP players play on credit. While non-gaming and mass-market revenue should be stable, Genting Singapore‟s VIP segment is its biggest swing factor.
Notwithstanding potential news flows and developments on junket approvals and Japan‟s gaming market, we expect 1H12 to be a quiet period as management focuses on the smooth rollout of RWS‟s West Zone.
However, signposts point to better days ahead. Firstly, additional room inventory from the launch of the Equarius Hotel and beach villas will help address capacity constraints. Secondly, junket approvals this year, if materialised, will inject additional liquidity into the market and cushion the impact from Genting Singapore‟s more-cautious lending policy. This bodes well for Genting Singapore whose target is primarily the VIP market. Thirdly, the completion of West Zone should allow for more aggressive marketing.
4.2 Languishing share price a reflection of caution
Figure 11, which tracks Genting Singapore‟s share price and consensus forward earnings estimates, suggests to us that its share price has been lagging consensus earnings upgrades over the past two years. Zooming into 2011 alone (Figure 12), Genting Singapore‟s share price seems to have reacted more significantly to consensus‟s gradual earnings downgrades.
4.3 Maintain OUTPERFORM and target price of S$1.90
Share price has fallen 26% relative to the FSSTI‟s 10% decline since last year, which we believe reflects moderating expectations on the Singapore market‟s GGR and RWS‟s market dominance, as well as concerns over the impact of economic instability on casino patronage. Expectations have been lowered and we think future incremental positives could lead to a stock re-rating.
Current share price provides an opportunity to position for a re-rating, we believe. Genting Singapore remains an OUTPERFORM with an unchanged SOP target price of S$1.90. It offers direct exposure to Singapore‟s lucrative casino gaming and rising tourist arrivals, on top of free cash flow yields of 7-8%.
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