Genting Singapore (GENS) was the second strongest STI constituent stock on 10 February, adding 1.8% by the closing bell. Macquarie Equities Research (MER) issued a report on Genting Singapore on 10 February with a 12 month target price of S$1.85, after the casino operator announced its plans to enter the Korean market. Here are some excerpts from the report.

Event
Genting Singapore announced after market close on 7 February that it has entered into a JV with HK listed Landing International to build a casino resort on the South Korean island of Jeju. The overall development is expected to be circa US$2.2bn and will include hotel towers, duty free shopping and a casino. In usual Genting style, it will be built in phases with assessments along the way of whether the project is generating an adequate return.
 
More so than a financial rationale to doing this project, MER thinks there is an important strategic reasoning. MER reiterate their Outperform on GENS. For some time now they have held the view that the market has failed to attribute any incremental return to its FCF due to a lack of investment direction. However, MER sees this investment as further evidence of GENS working toward a plan of deploying its cashflow in a return-accretive manner.
 
Impact
Information on the project is scant at this stage. While the land has been secured and the consortium intends to start construction in 2H14 (with Phase 1 expected to be complete in 2017), they have yet to receive a license to operate the foreigner-only casino. However, GENS is confident that it will obtain the license as it invests in the non-gaming aspects of the project.
 
At this stage it is hard to attribute a financial impact from this project given limited information on the casino. However, GENS is cash rich and hence funding the project should not be an issue. MER also know that the Genting group has a 10% unlevered hurdle rate, which suggests that this project, at its minimum, may be circa 10% earnings accretive once open.
 
Press reports suggest that the project could have as many as 800 gaming tables. If this is true, MER thinks the project could generate as much as 25% unlevered EBITDA ROI. MER’s Korean gaming analyst believes that in its initial phase the project may get 150 tables. However, one risk could be public opposition to such a large project.
 
MER thinks there is more to this project than meets the eye. In MER’s view, this deal has been done more for strategic reasons than financial. Jeju Island is a popular destination for not only Mainland Chinese but also Japanese and local Koreans.
 
MER thinks that building a "Resorts World" brand in Korea could bode well for Genting as it looks to establish its credibility for a license in Japan. If the brand is successful in attracting Korean and Japanese patrons, it may put Genting in a stronger position to secure a Japanese partner and gain support for a license in Japan.

Source: Macquarie Research - 11 Feb 2014