Resorts World Sentosa is Reopening: Should You Take A Gamble on Genting Singapore?

Over the weekend, Genting Singapore Ltd (SGX: G13) announced that Resorts World Sentosa (RWS) will be welcoming back guests from 1 July onwards.

Universal Studios Singapore, its theme park attraction, will reopen on 1 July with shortened operating hours (Thursdays to Sundays, 2 p.m. to 9 p.m.); while the S.E.A. Aquarium will reopen on 4 July with operations from Saturdays to Tuesdays 10 a.m. to 5 p.m.

This move follows the commencement of the Phase II post circuit breaker transition that will see Singapore opening up the bulk of its economy.

Prior to the announcement, RWS had to cease operations and suspend its service offerings since 4 April, aside from food and beverage operators that were deemed essential services.

The temporary closure, along with the plunge in tourist numbers due to lockdowns associated with the COVID-19 pandemic, led to the group issuing a profit warning for the first half of 2020’s results.

With RWS coming back to life and welcoming visitors once again, is it time for investors to have a relook at Genting’s investment thesis?

Strong track record, solid balance sheet

Genting Singapore has been operating profitably for many years, as evidenced by steady revenues above S$2 billion over the last six years.

Gross profit margin has climbed from the 30% plus level between 2014 and2016 to average around 42% in the last three fiscal years.

The group’s crown jewel, RWS, also churns out copious amounts of operating cash flow, to the tune of around S$1 billion per year.

With minimal capital expenditure requirements, Genting has been a free cash flow generation machine.

Dividends have also been climbing steadily, from just S$0.01 in 2014 to S$0.03 in 2016 and increasing to S$0.04 last year.

The group’s balance sheet also remains rock-solid, with S$3.9 billion of cash and just S$260.6 million of gross debt as at end-2019.

Significant but short-term hit to net profits

However, the adverse impact from the pandemic could not be avoided.

In its 2020 first-quarter business update, Genting reported a sharp year on year fall of 38% and 34% in gaming and non-gaming revenue, respectively.

While net profit was not disclosed, the group did report that its adjusted EBITDA (earnings before interest, tax, depreciation and amortisation) plunged by 55% year on year.

If we factor in a layer of fixed operating cost required to maintain RWS’ facilities, it’s not too far-fetched to imagine that the fall in net profit should be greater than 55% year on year.

Furthermore, the impact will be worse for the second quarter, as this was the period when the circuit breaker measures kicked in.

Investors can expect a horrible-looking report card, but need to be mindful that this poor performance is only temporary.

As RWS reopens on 1 July, revenue should start flowing again, albeit slowly due to the reduced operating hours.

The worst seems to be over for the group, at least for now.

However, it may be a slow and painful climb back to pre-pandemic visitor levels.

The group envisages that travel and tourism spending could return to pre-crisis levels only in late-2021 or the early part of 2022.

Expansion initiatives in place

The good news is that Genting has, in place, expansion initiatives that can help to grow the business over the longer-term.

The first is the planned expansion of RWS, termed “RWS 2.0”, that will add around 50% new gross floor area to RWS’ existing space.

New attractions such as an oceanarium and waterfront lifestyle complex are slated to be built.

With COVID-19, the construction schedule may be pushed back somewhat but is still expected to be completed within the next five to six years.

The second initiative is the planned bid for an integrated resort (IR) in Osaka, Japan.

Genting has confirmed that the investment amount should not exceed US$10 billion, and that funding will include a combination of cash investment, equity partner contributions and project financing (i.e. debt).

Although these two projects will significantly increase capital expenditures for the group, they will also open up new revenue streams for Genting.

Get Smart: A wager you can bet on

We should take a step back and take a hard look at Genting’s core business.

Being one of only two IR operators in Singapore, the group has a natural competitive advantage and will benefit from increased tourism after the effects of the pandemic have passed.

Historically, the business has also been extremely cash-generative and boasts high net profit margins.

The group has also been generously rewarding shareholders with increased dividend payouts over the years.

With expansion plans in place, investors may wish to consider keeping Genting in mind as a potential investment.

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Disclaimer: Royston Yang does not own shares in any of the companies mentioned.

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