Yesterday, Genting Singapore sank 6.7% to below the $1 level for the first time in nearly 5 years after reporting very weak fourth quarter results which were below street estimates. Macquarie Equities Research (MER) which had in January released a research note an Underperform rating with a 12-month target price of 95 cents had forecasted a set of disappointing fourth quarter results from Genting Singapore. In a separate report released on Tuesday, MER dissected the actual results and concluded that this is not the right time to bottom pick…

Here are  excerpts from the MER piece on Genting Singapore published on 24 February 2015:
 
Event

• Genting Singapore (GENS) reported very weak fourth quarter 2014 (4Q14) results, with profit of S$89m (-36% year-on-year), 52% below street and 39% below MER estimates.
• GENS had three one-offs in 4Q14 (loss on derivatives of S$146m, gain on asset sale of S$153m and net exchange gain of S$75m). Ex one-offs, GENS 4Q14 profit is only S$7m according to MER calculations.
• GENS VIP win rate was 2.2% in the quarter. At theoretical win rate of 2.85%, GENS 4Q14 clean profit came in at S$103m, still 45% below street estimates.
• GENS continues to disappoint the street’s bullish hopes as its growth remains under tremendous pressure from declining VIP volumes. In addition, increasing bad debts are eating into its profitability, in MER’s view.

 
Results’ highlights:
Revenue growth under pressure from declining VIP: Revenues declined 8% year-on-year (yoy), driven by a 15% decline in VIP volumes, according to MER’s analysis. VIP volumes declined 6% quarter-on-quarter (qoq), which is the weakest in the last two years.
 
Bad debt provisioning just keeps rising, eating into margins / profits: Bad debt provisioning for 4Q14 rose to S$82m (from S$40m in 3Q14), 22% of VIP gross revenues. This is much higher than management’s target of 10-12%. This further supports MER’s thesis that GENS policy of extending aggressive credit to VIP players to grow its market share will hurt its profits.
 
Looking forward:
VIP volumes will continue to fall in 1H15: VIP volumes in Singapore started declining only from from second half of 2014 which MER believes will remain under pressure from less Chinese VIP volumes in the first half of 2015. Moreover, a high VIP volume base of the first half of 2014 (S$42.5bn) will result in YoY decline in VIP growth in 1H15, in MER’s view.
 
Korea project has broken ground but any material impact is 2-3 years away: Given the presence of many local casinos and foreigners only casinos in the region, MER is sceptical about the value added from the casino to GENS’ overall profitability.
 
Japan legislation hasn’t even started: The bill has been pushed back many times and it will take at least 5 to 7 years to build the casino even after the first bill is passed this year.
 
Price catalyst
12-month price target: S$0.95 based on a DCF methodology.
Catalyst: 1Q15 results

Action and recommendation
More downgrades to follow; No catalysts in sight; Not the right time to bottom pick: Despite the stock having fallen 15% over the past 6 months (vs 5% gain for the STI), Genting Singapore is still the most expensive gaming stock in Asia on a price-to-earnings ratio at 21x (based on projected earnings for 2015. Its EV / EBITDA ratio is at 9x, at a premium to mature market casinos in New Zealand, Australia and Malaysia.

Source: Macquarie Research - 26 Feb 2015