Genting Singapore (GENS) announced earnings last Thursday which greatly disappointed, and the shares immediately plunged 5.9% the next trading day. Since then, Genting shares have been trading below the $1 level. Macquarie Equities Research (MER) released a research report on the same day (14th May) they announced their earnings and reiterated its ‘Underperform’ rating, foreseeing four problems that Genting will face. Read on for excerpts…..
 
Event
GENS disappointed the Street’s unrealistic expectations yet again with its 1Q15 profit 60% below consensus and MER’s estimate at only S$62.7m (-73% YoY). 1Q15 earnings before interest, tax, depreciation and amortization (EBITDA) was 32% below MER’s estimates at S$233m (-45% YoY).
 
VIP volume declined by as much as 46% YoY and 25% QoQ. This is much higher than MBS VIP volume decline of 22% YoY reported in 1Q15. Overall VIP volume in Singapore was down 38% YoY and 14% QoQ.
 
The most negative takeaway from the results is management’s extremely negative commentary on future VIP volume. GENS management said that the VIP business is under severe pressure and it does not envisage any improvement in the near future.
 
MER’s current profit estimates are 15% and 17% below consensus for 2015 and 2016, respectively. MER expects significant street downgrades now that 1Q15 profit was only 10% of consensus 2015E estimates.
 
Impact
Problem #1: VIP business cracking severely in Singapore – it is almost a loss-making business now: If MER incorporates GENS management’s view that SG VIP gaming volume will not recover in the near future, GENS VIP volume, extrapolating its 1Q15 level, would come in at S$50bn in 2015E, a significant 35% YoY decline. While MER is building in only a 7% YoY decline, the Street is building 0%.
 
Problem #2: Direct credit given to VIP in the past will erode all VIP EBITDA in 2015: Bad debt provisioning rose to as high as 24% of VIP gross gaming revenue (GGR) in 1Q15, up from 10-12% levels in the past as GENS accelerated its provisioning due to past debts turning bad. GENS said that provisioning will remain at elevated levels in 2015 which implies that almost all VIP EBITDA in 2015 will be eroded by the bad debt provisioning (~S$300m).
 
Problem #3: Mass market – no upside given lower visitation and losing out to MBS: Mass market net revenues were flat YoY and declined 8% QoQ. GENS trails MBS in the mass market segment with only 41% market share.
 
Problem #4: Even non-gaming is suffering because of low visitation: Non-gaming revenue declined significantly by 8% YoY. This is the lowest non-gaming revenue in two to three years, driven by lower visitation, in MER’s view.
 
Earnings and target price revision
No change.
 
Price catalyst
12-month price target: S$0.80 based on a discounted cash flow (DCF) methodology.
Catalyst: 2Q15 results.
 
MER’s action and recommendation
Downgrades to follow, multiples to expand, stock much more expensive than it seems: MER sees the stock gradually trading down to MER’s target price of S$0.80 driven by Street downgrades and expansion of multiples.

Source: Macquarie Research - 19 May 2015