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Analysts mostly bullish on Genting Singapore's $4.5 bil investment for RWS 2.0 as price plunges to 3-month low on fears

SINGAPORE (Apr 4): Analysts are generally positive on Genting Singapore (GENS) following the announcement of plans to invest $4.5 billion to renew and refresh Resorts World Sentosa (RWS).

In view of this investment, the government has agreed to extend the exclusivity period for the two casinos at RWS and Marina Bay Sands (MBS) to end-2030. MBS also committed to a $4.5 billion investment to expand its property.

Authorities add that no other casinos will be introduced during this period.

The government will give RWS an option to deploy an additional 500 sq m of approved gaming area (AGA). The IRs are currently each allowed 15,000 sq m of AGA.

RWS will also be given an option to increase its allowable gaming machines by 800. Within the AGA, each IR is currently allowed 2,500 gaming machines.

The new deal inked with Sentosa Development Corporation (SDC) will see RWS increase its gross floor area by approximately 50% as it adds some 164,000 sq m of gross floor area of leisure and entertainment space.

The new developments will include the expansion of Universal Studios Singapore, a re-branded Singapore Oceanarium, and the addition of 1,100 hotel rooms with two new destination hotels at a new waterfront lifestyle complex, on top of an expansion of Meetings, Incentives, Conferences and Exhibitions (MICE) facilities.

To further improve accessibility into Sentosa, RWS will also introduce a driverless transport system to offer visitors more efficient last-mile connectivity across the Sentosa Boardwalk.

See: Genting Singapore inks new deal for $4.5 bil expansion of Resorts World Sentosa; exclusivity period for IR extended to end-2030

In light of the RWS 2.0 announcement, DBS Group Research, OCBC Investment Research and UOB Kay Hian are keeping their “buy” calls on GENS.

Analysts say the development is positive in the long-term, even as some potential short-term headwinds have emerged.

“The ability of GENS to generate additional gaming revenues has been constrained by the lack of hotel rooms and gaming guests not staying in Sentosa [hence] reducing time spent in the casino. More rooms should enhance GENS’ gaming revenue,” says DBS analyst Mervin Song in a flash note on Thursday.

“We believe the development of RWS 2.0 is a transformative event for GENS with potential for its gaming and non-gaming revenue to reach new levels beyond 2025,” Song adds.

DBS has a street-high target price of $1.54 on GENS, which is pegged to the group’s average enterprise-value (EV)/EBITDA multiple of close to 12 times.

“A major positive is the government’s affirmation and extension of the exclusivity concession period for Resorts World Sentosa (RWS) and Marina Bay Sands (MBS) through to 2030,” says UOB analyst Vincent Khoo in a report on Thursday. “The gaming expansion is envisioned to attract and enlarge the premium mass segment.”

However, UOB is trimming its target price to $1.26 from $1.32, on the back of the longer payback period for its commitment to make the hefty reinvestment in Singapore.

GENS has said the expansion development will be funded by way of internal resources including operating cash flows, as well as bank borrowings. But analysts have noted that the group could finance around two-thirds of the investment via debt.

Despite the lower target price, Khoo notes that GENS “continues to trade well below most of the regional peers’ even after the recent share price uptrend and earnings cut.”

Meanwhile, OCBC is maintaining its fair value estimate of $1.31.

“When fully developed, its facilities will be able to capture more Meetings, Incentives, Conferences and Exhibitions (MICE) attendees and more tourists to its expanded hotels and tourist attractions,” says analyst Carmen Lee in a note on Thursday.

However, Maybank Kim Eng Research is cutting its recommendation to “hold” from “buy” on fears that short-term earnings will be affected by a 50% rise in casino entry levies for Singaporeans and permanent residents, as well as a close to 3% hike in gaming duties.

The brokerage is also lowering its target price by 11% to $1.12 on the back of a 6-16% cut to earnings estimates for FY19-21 to the higher casino levies, which it believes is negative to mass market gross gaming revenue (GGR).

Furthermore, RWS will be subject to higher casino tax rates come March 2022. This will also be exacerbated by the 2ppt GST hike to 9% expected to take effect between 2021 and 2025,” says analyst Yin Shao Yang in a Thursday report.

“On balance, we gather that the effective casino tax rate will be hiked by 5ppts. Thus, we fear that GENS earnings will structurally contract again come Mar 2022 before growing as the new RWS2.0 development and enhancements come on-stream by 2024-2025,” the analyst adds.

As at 3.28pm, shares in GENS have plunged 9.4% to a three-month low of 97 cents on fears of the $4.5 billion cash splash and hike in casino entry levies.

According to DBS valuations, the stock is trading at an estimated price-to-earnings ratio of 15.2 times and a dividend yield of 3.4% for FY19.