SI Research: Should You Bet On Genting Singapore?

Casino operators used to enjoy record levels of revenue until the Chinese government under the reign of Xi Jinping decided to crackdown on money laundering activities and capital outflows from China. This was a huge blow to casino operators in the Asia as most of the VIP visitors are from China. Since then, the premium gaming industry has been riding on a downtrend for the past couple of years and Genting Singapore was no exception.

Genting Singapore’s share price had fallen from a high of $2.19 in 2010 and had stayed largely below the $1-mark since May 2015. However, the stock has been on a tear since the beginning of the year. After closing 2018 at $0.975, shares of Genting Singapore have risen to $1.06 to register a year-to-date return of 8.7 percent as at 25 February 2019. On the other hand, the Straits Times Index only recorded a rise of 6.6 percent. Is this a sign of bottoming out and an opportunity for investors to place their bets

Resilient Financial Performance

Despite the economic uncertainties and intensifying competition, Genting Singapore ended FY18 on a high note. In FY18, revenue increased 6.1 percent to $2.5 billion while gross profit rose 7.3 percent to $1.2 billion as gross margins improved from 44.9 percent to 45.4 percent. The revenue growth was driven by the 5.7 percent growth in gaming segment and seven percent growth in non-gaming segment.

Meanwhile, the impairment on receivables for the VIP gaming business in 4Q18 spiked to $35.6 million from $4.7 million in 4Q17 and $12.9 million in 3Q18. However, in FY18 as a whole, the impairment charge of $58.1 million is considered at a manageable level as compared to $235.1 million in FY16. Going forward, given the uncertain macroeconomic conditions, management will keep a close eye on its VIP business segment and exercise caution when extending credit to VIP customers.

On the other hand, depreciation of property, plant and equipment in 4Q18 also jumped 43.7 percent to $98.2 million. We could view the higher depreciation as a positive sign that Genting Singapore is close to finalising plans to refresh its Resort World Sentosa property, although it is still not able to disclose them.

The adjusted earnings before interest, tax, depreciation and amortisation increased 6.8 percent to $1.2 billion while net profit jumped 10.2% to $755.4 million. Excluding the one-off gain of $96.3 million in FY17 arising from the disposal of its 50 percent stake in an integrated resort in Jeju Island of Korea, net profit registered a strong 28.2 percent growth!

Others segment also fared better as well. Attraction business such as Universal Studios Singapore, SEA Aquarium and Adventure Cove Waterpark had registered a daily average visitation of 21,000 visitors while Hotels business had outperformed the industry with a high occupancy rate of 95 percent.

Strong Balance Sheet

Another plus point of which Genting Singapore has would be its strong balance sheet. As of 31 December 2018, the group holds $4.2 billion of cash and cash equivalents. Netting off $1 billion of bank borrowings and trade payables, Genting Singapore still has around $3.2 billion of cash on hand, equivalent to around $0.26 net cash per share.

Furthermore, Genting Singapore’s debt-to-equity ratio is only at 0.13 times. This financial strength will subsequently allow Genting Singapore to have more flexibility for acquisition or to develop foreign integrated resorts.

Adding to this, Genting Singapore had proposed a final dividend of $0.02 per share, bringing FY18 dividend to $0.035 per share. At the prevailing share price of $1.06, this would then represent a dividend yield of 3.3 percent, not bad at all for a potential growth stock.

Future Outlook

A catalyst which investors may look out for is the licenses for three integrated resorts in Japan, of which Genting Singapore is expected to be amongst the top contenders. Japan represents another area with more opportunities given its largely middle-class population, mature infrastructure and proximity to China, which still remains as the main source of many casino customers.

The formal bidding process for Japan’s gaming license is expected to commence in 2H19. After having disposed its stakes in its South Korea venture on Jeju Island, Genting Singapore has propped up its balance sheet to focus on its Japan’s foray. Genting Singapore is expected to proactively bid for the license to operate in Japan and this new development may very well be the spark to see Genting Singapore enjoy another wave of buying interest from investors.

Fair Valuation As Comparing To Peers?

As at 26 February 2019, Genting Singapore is trading at $1.05, translating to a price-to-earnings (P/E) multiple of 16.9 times, well below its average regional peers of 19.2 times. Meanwhile, Genting Singapore’s shares are currently valued at price-to-book (P/B) ratio of 1.6 times, making it an attractive counter when compared to its listed peers in the table below.

Given Genting Singapore ’s improving results, healthy balance sheet and optimistic outlook, we think Genting Singapore is definitely one counter that we should be adding into our watch list.

Company	Listing	Price	P/E Ratio	P/B Ratio	Div Yield (%)
Genting Singapore	SGX	$1.05	16.91	1.64	3.77
Genting Malaysia	Bursa	RM3.46	–	1.12	3.13
SJM Holdings	HKSE	HK$9.63	21.73	2.06	2.41
Wynn Macau	HKSE	HK$20.35	20.62	47.71	1.62
MGM China Holdings	HKSE	HK$16.90	36.60	7.30	0.95
Average			19.17	11.97	2.38

Source: Bloomberg (as at 26 February 2019)