Genting Singapore - Turning hopeful on Japan
- GENS has done well to scale down its VIP business, amid challenges from China’s anti-corruption drive, in a bid to protect profits and margins.
- Key catalysts ahead are higher dividends and potential foray into Japan should the casino bill be passed.
- Maintain Add and SOP-based target price of S$0.89.
Efforts to scale down VIP business showing up in margins
- Since China’s anti-corruption drive, GENS has tightened credit extension policies to Chinese VIP players, which has led to lower bad debt charges.
- It has also rationalised operations in the VIP segment by deploying staff to the mass segment, removing excess headcount and converting VIP space into additional hotel rooms, among others. This has led to meaningful cost savings, which has resulted in an adjusted EBITDA margin of 40.2% in 3Q16, the highest in nine quarters.
- Resorts World Sentosa (RWS)’s focus has shifted to the higher-margin mass segment. It continues to spearhead new initiatives to drive better mass and premium mass visitation to RWS, including bringing in Michelin-starred chefs, refurbishment of the property, and the introduction of more marquee events.
Most of cost cuts done, now focusing on maintaining profitability
- We expect adjusted EBITDA to stabilise at around 3Q16’s levels going forward, as most of the cost and job cuts in the VIP segment are likely to have been done.
- The VIP segment could see some seasonality and will still see some pressure on volumes, but we expect the mass gaming segment to hold up relatively well. Strong non-gaming performance through the introduction of new events could also provide some support.
Turning more hopeful on Japan, a longer-term catalyst
- GENS has turned more hopeful that the casino bill will be passed in Japan.
- It intends to dispose of its 50% stake in Resorts World Jeju in 1Q17, including both the integrated resort and residential development plots, as it focuses its efforts on winning a bid in Japan. With the Chinese government’s recent move to discourage outbound travel to South Korea, we think the exit from Jeju could also help to lower downside risk.
- While Japan is an attractive gaming market and positive news flow could provide near-term share price support, the impact on earnings will only show up in the longer term, possibly after 2020. Meanwhile, significant resources could be required over the medium term if it is successful in its bid.
Near term, more certainty that higher dividends will be paid
- In the near term, we think a higher dividend payout could be the key catalyst, as this is the first time GENS has committed to returning more cash to shareholders.
- GENS has also committed to paying higher ordinary dividends based on the stable cash flows generated from RWS, net of investments required for Japan.
- Its S$81m gain on the disposal of its 50% stake in Resorts World Jeju also bolsters its ability to pay higher dividends, if not a special dividend, in 2017.
- We maintain an Add call and SOP-based target price of S$0.89.
- Higher dividends and potential foray into Japan are the key catalysts.