The STI swung between gains and losses yesterday and traded in a tight range. It finally ended at 3288.76, flat for the day. Genting outperformed the STI, gaining 1.9% and closed at $1.585 for the day. Although the company announced 30% lower profits on 21 February, its shares rallied as results came in better than expected. Genting added 5.7% in the two days immediately after the earnings report.

MER’s price target of $1.85
Macquarie Equities Research (MER) released a research report on Genting on 22 February after the company’s earnings were released,  maintaining an ‘Outperform’ rating on the company and raising its 12-month price target by 16% to $1.85 (+XX% from yesterday’s close). MER’s optimism is attributed to a sustained recovery in VIP volumes, mass market growth resuming as the drag from decline in local visitation slows, the ramp-up of the MLP and cost rationalisation in 2H13. Any use of the growing cash mound to make acquisitions could be a further positive. Below are further excerpts from the research report.

MER’s positive thesis on Genting Singapore (GENS) materialised in the 4Q12 result, with VIP growth resuming (as issues with the credit book were resolved), the mass market segment growing (not deteriorating, as some feared) and Marine Life Park (MLP) becoming a revenue contributor.

Earnings analysis
Genting’s flagship property, RWS, put up a strong performance. Overall gaming and non-gaming revenues rose 19% and 23% quarter on quarter. To MER, the most interesting trend was in the mass market segment. While overall gross gaming revenues rose 13% YoY, led by 56% increase in VIP volumes, it was good to see that mass market still grew 4% YoY. This should allay the concern of some investors who feared that the contracting domestic market will impact RWS’s earnings before interest, tax, depreciation and amortization (EBITDA) growth – instead it is apparent that the company has continued to target new markets. Strong VIP growth was impressive, but came as a result of credit extension.

The Marine Life Park (MLF) had 40 days’ worth of contribution and already has 7.1k visitation per day vs 11k at Universal Studios. Management noted that this facility had not been fully exploited as yet, with visitation still rising, ticket prices likely to go up and higher revenue-generating amenities to open.

Management also noted that cost rationalisation would be a focus in 2H, and would be a “kicker” to EBITDA performance. The real question is the extent to which the cost base can be optimised. In MER’s view, GENS has a strong track record for this, given the company was able to keep its cost base flat while ramping up the Marine Life Fund in 9M12. MER’s projection is for EBITDA margins to increase from 44% in 2012 to 50% in 2H13.

GENS ended 2012 in close to a net cash neutral position. With the company generating close to $1bn in free cash a year, it has the ability to make sizeable acquisitions or greenfield investments. Interestingly management said greenfield questions were some time off, but cash was being retained for acquisition opportunities – which begs the question what could these be?

Source: Macquarie Research - 26 Feb 2013