Genting Singapore - Shortfall In 2Q12 Results

Price Target: $1.31 | HOLD | Upside 2%

No reason to upgrade. While 2Q12 results were in line, fundamentals disappointed with both VIP volume and mass market GGR falling YoY and QoQ despite two new International Marketing Agents (IMA) and the new 194-room Equarius Hotel & Beach Villas. We cut our FY12-14 net profit estimates by 10-15% on lower VIP volumes. Our EV/EBITDA-based TP is lowered to SGD1.31 (-6%). M&A opportunities are unclear, giving us no reason to lift our call on both valuation and M&A grounds.

Earnings in line... 2Q12 core net profit of SGD171.3m (-16% YoY, - 23% QoQ) brought 1H12 core net profit to SGD393.6m (-27% YoY), within expectations at 50% of our full year estimate but only 41% of consensus. 1H12 revenue of SGD1.5b (-9% YoY) was also in line at 49% of our 2012 estimate. No dividends were declared, as expected, but GENS expects 2012 DPS to be at least flattish YoY at 1 cent.

… but fundamentals disappointed. 1H12 results were in line only due to a VIP hold of 3.3% (2Q12: 3.1%) vs. our 2012 assumption of 2.85%. Drilling deeper into the results, 2Q12 EBITDA of SGD311m (-10% YoY, -17% QoQ) and EBITDA margin of 44% were the weakest on record. Operations-wise, we estimate that 2Q12 VIP volume fell 18% YoY and 14% QoQ while mass market GGR contracted 5% YoY and 8% QoQ.

A lot of effort put in but not much to show for it. The two new IMAs (since Mar 2012) and the new Equarius Hotel & Beach Villas (since Feb 2012) failed to lift VIP volume. GENS attributed this to a poor economic environment. Coupled with 1,300 new employees to staff the Marine Life Park which is expected to open by year-end, margins are expected to remain subdued for the next two to three quarters.

Cutting earnings estimates by 10-15% and TP to SGD1.31. 2Q12 total VIP volume (Resorts World Sentosa and Marina Bay Sands) fell 11% YoY and 12% QoQ and we are bearish on 3Q12. Annualising total 2Q12 VIP volume of SGD27.8b would see 2012 VIP volume fall 8% YoY. Our revised estimates assume this will be the case for GENS, though partially offset by a raised 3.1% VIP hold for 2012 (1H12 VIP hold was 3.3% which implies 2H12 VIP hold of 2.85%). On an unchanged 11x 2012 EV/EBITDA, we lower our TP to SGD1.31 (-6%).

We are bearish on 3Q12. Competitor Marina Bay Sands explained that its high 3Q11 VIP volume of SGD20.5b was only due to 25 unique VIPs who have not returned. Thus, it does not expect its 3Q12 VIP volume to be as high. As VIPs usually patronise both integrated resorts, we do not expect total 3Q12 VIP volume (Resorts World Sentosa and Marina Bay Sands) to be anywhere near as high as the SGD36.6b in 3Q11. Both will likely have to compete for a much smaller 3Q12 total VIP volume.

No clear plans for the SGD2.3b raised. GENS, in last Friday’s analyst teleconference, maintains that Feb and Mar 2012 was best time to raise its SGD2.3b in perpetual securities. That said, it could not identify any near-term investment opportunities although it was confident of Japan liberalising its casino industry over the next 12 to 18 months. Until then, the 5.125% interest rate on the SGD2.3b of perpetual securities will dilute its earnings. We have imputed this into our earnings forecasts for FY12-14.

None for Echo either. GENS again reiterated its stance that its 4.8% stake in Echo Entertainment Group (EGP AU, Not Rated) is merely a portfolio investment. It clarified that it was related company Genting Hong Kong (GENHK, BUY, TP: SGD0.53), which has a larger 5.1% stake, that had applied to raise its stake. If GENHK receives approval, GENS may theoretically be allowed to raise its stake too. That said, we understand that the approval process may take several months.

Source: Maybank Kim Eng Research - 13 August 2012