Warrants Highlight

Genting - Profits to Recover, Attractive at Current Price (MER)

Yesterday, Macquarie Equities Research (MER) upgraded Genting Singapore (GENS) from Neutral to Outperform and raised its target price from $1.55 to $1.70. The following are excerpts from its research report on 15th Aug.

Profits to recover, attractive at current price
MER admits the 2Q12 result was weak but believe this was dragged down by a number of factors that should start to get resolved from 4Q12, driving a recovery in profitability that could positively surprise investors. MER is around 5-10% ahead of consensus on EBITDA projections.

Given its slower growth profile, GENS may look expensive 9.3x 2013 tax-adjusted EV/EBITDA compared to Macau at around 9x. However, GENS has another 25 years left on its concession, vs Macau at 8–10 years. This gives investors more certainty on GENS’s long-term cashflow generation ability and is a reason why GENS’s multiple cannot be simply compared to Macau. MER believes GENS looks more attractive than Macau on Free Cash Flow (FCF) yield. GENS’s 2013 FCF yield is 7.7%, but the company has completed all of its capital expenditures, while Macau trades at 6–11% with significant Cotai capital expenditures yet to come. MER also finds GENS attractive as the current price implies 2.5% p.a. FCF growth.

Impact
MER believes that GENS’s 1H12 performance was held back by a number of factors that are set to turn around from 4Q12. These factors not only impacted revenue performance, but also margins performance and MER expects them to reverse from 4Q12. These factors include:

- MER believes that in 2Q12, GENS started to incur a substantial portion of the daily operating costs for the Marine Park without any revenue benefit, depressing the margins. Hence, the opening of the Marine Park in 4Q12 should allow GENS to generate revenues and for margins to recover.

- The Marine Life Park should allow GENS to market the full capabilities of its resort facility to mass-market patrons. With EBITDA margin at 45% in 2Q12, MER expects GENS to look at cost-cutting to bolster margins from late 3Q/early 4Q12.

- The construction on the West Zone and the Marine Life Park also meant that GENS was not able to push its new VIP hotel room capacity aggressively. MER sees this changing from 4Q12. For instance, at GENS’s VIP hotel product (Equarius), 50% of patrons are non-gaming.

- GENS has also worked on improving the quality of its credit book and with this behind it, MER expects that in an improving macroeconomic climate, credit extension may improve, driving VIP growth.

Earnings and target price revision
2012/13 EPS lowered 22%/3% mostly due to non-cash items. FY13 EBITDA is largely unchanged although MER's new target price of S$1.70 implies a lower FCF yield than MER was previously applying (6% now vs 7% earlier).

Price Catalyst: Opening of Marine Life Park in 4Q12

Singapore Market Wrap

STI falls with concerns over slowing economic growth

With "Europe on the brink of recession" making headlines on The Straits Times, bearish sentiments hit investors and the STI and the HSI fell for the day. Eurostats, the European Union's statistics agency reported that the euro zone contracted 0.2% in the second quarter of the year.

Closer to home, Singapore reported retail sales figures, which came after announcing that the economy shrank 0.7% in second quarter. Retail sales fell in June, slipping 0.9% from the same period the previous year. It grossly missed the Bloomberg survey which expected a gain of 0.1%.

The STI closed at 3062.11, down 0.8% dod while the HSI closed at 20,052.29, down 1.2% dod.

STI 3100MBeCW121031 (Q1AW) exercise level 3,100.*
STI 2950MBePW121031 (Q0ZW) exercise level 2,950.*

HSI19800MBeCW120927 (Q1DW) exercise level 19,800.*
HSI20400MBePW120927 (Q1SW) exercise level 20,400.*

Sembcorp Marine secures US$135mil contract
Before the STI started its trading session, Sembcorp Marine announced that its Jurong Shipyard has secured a contract worth US$135mil to add new capacity to Diamond Offshore's deep water rig fleet. The rig is expected to be delivered from Singapore in the second quarter of 2014.

Sembcorp Marine CEO, Mr Wong Weng Sun is happy with the partnership and is "heartened by Diamond's trust and confidence in the company and they will continue to build on the strong partnership and synergy going forward".
Sembcorp Marine closed at $5.13, flat for the day

Call warrant SembMar MBeCW130104 (Q4NW) exercise price $5.50.*
Call warrant SembMar MBeCW121203 (Q0OW) exercise price $5.00.*
Long dated call warrant SembMar MBeCW130603 (M8NW) exercise price $5.59.*

Wilmar- laggard in the STI
Wilmar led the drop in the STI yesterday after announcing disappointing earnings. Its second quarter net profit fell 70% compared to the same period the previous year. The fall in net income was mainly attributed to losses at its oilseeds and grains business and on lower earnings from its plantations.

Late last month, China authorities told Wilmar to keep wholesale prices for packaged products stable so as to avoid stoking inflation. Going forward, this may crush margins for the company.

Investors were disappointed with Wilmar's reported results and sold the stock. The counter closed at $3.15, down 7.1% dod.

Call warrant Wilmar MBeCW130201 (Q3OW) exercise price $3.50.*
Put warrant Wilmar MBePW130103 (QZ4W) exercise price $3.50.*

Overnight Market Wrap

Quantitative easing or not

US investors saw a choppy session yesterday and trading volumes were light, falling below the average. The S&P gained a mere 0.1% as compared to the previous trading session.

Many investors are undecided about the markets since all eyes are on the Fed and many are looking for clues as to whether there would be a third round of quantitative easing. Data released the past few days gave off mixed signals and left investors unsure of what to expect. Companies are starting to hire and the recent jobless claims fell, but unemployment rate is still above 8%. Retail sales were better than expected and industrial production grew in July but manufacturing in New York unexpectedly fell.

The Fed would be meeting at the end of the month.

Overnight Markets

Indices	Last	Change
STI	3062.11	-0.8%
HSI	20052.30	-1.2%
DJIA	13164.80	-0.1%
S&P 500	1405.53	0.1%
Nasdaq	3030.93	0.5%
China A50	7346.73	-1.1%

Corporate News

Corporate Announcements

Results announcements:
Tue 28 Aug: Olam 4Q12

Ex-dividend dates:
Wed 15 Aug: DBS ($0.28), SembMarine ($0.05)
Wed 21 Aug: STX OSV ($0.13)
Wed 22 Aug: Wilmar ($0.02)
Thu 30 Aug: Sakari ($0.02), UOB ($0.20)
Wed 26 Sep: SGX ($0.15)