Resorts World Sentosa is struggling.
CIMB believes the company faces not just earnings risk but increased risk premium from overregulation and other issues that will restrict its capacity to grow.
Here's more from CIMB:
Start of an earnings downcycle
We believe the weak performance seen over the last two quarters represents the start of a protracted earnings downcycle.
We think there is more downside risk to our numbers as Resorts World Sentosa (RWS) grapples with the challenges of restricting its focus on the international mass market as the only avenue of growth.
The significance of the regulatory regime is starting to bite as illustrated by the last two quarters when the lack of junket VIP credit and the clampdown on local mass market access have squeezed earnings. The risk premium of the Singapore regulatory regime is being priced in.
Not just regulation but real estate
The recent record bid for land in Jurong East of S$238m at S$1,167 psf by GENS to build a three-star hotel 15 minutes away from RWS, shows the additional difficulties of navigating in the current landscape.
More hotel rooms are key to growing the international mass market business. Again, unlike other gaming destinations, the scarcity of land is an additional factor that could restrict growth.
M&A, the only catalyst
GENS is trading at a 20% discount to the Macau averages, which is justified. The shares should find support at these EV/EBITDA multiples but the overhang of continued downside risk to estimates will be the main factor.
M&A on potential opportunities in Japan seems to be the only catalyst for now.
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