• Genting Singapore (GENS)’ 3Q18 EBITDA of S$319m flat y-o-y but up 20% q-o-q, in line with expectations.
• Drag from lower VIP win rate; 2.9% vs 3.1% in 3Q17offset by 14% y-o-y growth in VIP rolling chip volumes.
• Earnings growth still possible despite risk of a slowingAsian casino market as GEN’s regains market share.
• Strong balance sheet and higher earnings underpins prospects for higher final dividend for 4Q18.

Trading Below -2SD EV/EBITDA

• We maintain our BUY call on Genting Singapore (GENS) with the Target Price of S$1.55.
• GENS’ share price has corrected over the last few months on the back of slowing gross gaming revenues (GGR) in Macau and fears over a potential slowdown in China which in turn will negatively affect GENS’ VIP business. China is a significant source of customers for GENS. Nevertheless, we believe the majority of these concerns have been priced in given GENS now trades on a EV/EBITDA of 5.5x, below -2SD EV/EBITDA of 5.8x.

Where We Differ – Deserves to Trade at Average EV/EBITDA Multiple

• Consensus’s Target Price implies an EV/EVITDA multiple that is below GENS’ average multiple of 12x. We believe GENS deserves to trade at its average EV/EBITDA multiple given a sustained earnings recovery outlook.
• Furthermore, the reasons why GENS traded below its average multiple, namely elevated bad debts and falling earnings, are no longer present.

Re-rating Catalyst

• Despite the turnaround in profitability after the challenging period in 2015-16, some investors remain sceptical over the sustainability of GENS’ earnings recovery. We believe as we progress throughout 2019, as GENS selectively extends credit to its VIP customers which should translate to higher y-o-y increase in earnings, this scepticism should subside, resulting in a re-rating of GENS’ share price.
• We believe there is upside potential to GENS earnings as its VIP rolling chip only stands at US$6bn a quarter versus a peak of US$14b-15n.

Key Risks to Our View

• Decline in VIP and mass businesses. The key risk to our positive view is a slower-than-expected recovery or decline in GENS’ VIP and mass divisions.

What's New - Sustained Improvement in VIP Business Volumes

3Q18 results in line with expectations

• Genting Singapore (GENS) reported a credible set of 3Q18 results considering 3Q17 was boosted by above average VIP win rate of 3.1%.
• GENS' 3Q18 adjusted EBITDA was flat y-o-y at S$319m but up 20% q-o-q owing to a below average VIP win rate in 2Q18.
• Meanwhile, 3Q18 normalised profit (excluding exceptional items) jumped 16% y-o-y to S$210.4m mainly attributed to the absence of coupon payments for the perpetual securities which were redeemed late last year.
• Overall, 3Q18 results were in line with our expectations with 9M18 adjusted EBITDA of S$944m (+5% y-o-y) forming 75% of our full year estimates.

Sustained improvement in VIP rolling chip volumes

• As previously guided, Genting Singapore (GENS) continued to selectively extend credit and grow its VIP business. 3Q18 VIP rolling chip was estimated to have grown by 14% y-o-y or 10% q-o-q to S$8.6bn. This robust growth in rolling chip helped offset the negative drag from an above average VIP win rate of 3.1% in 3Q17. For 3Q18, the VIP win rate came in at 2.9%.
• Over the quarter, bad debts rose sequentially to S$13m from S$0.5m in 2Q18. While this appears a large jump, bad debts remain under control, significantly less than peak levels a few years ago of S$90m and is tracking in line with our bad debt estimate of S$14m per quarter.
• Meanwhile, the mass business (tables and slots) was stable with gross gaming revenue flat y-o-y.
• Another highlight from 3Q18 result was 26% q-o-q and 9% y-o-y increase in non-gaming revenues. We understand this is largely attributed to the increase in ticket prices at the aquarium and growth in visitors to Universal Studios Singapore.

Still in a net cash position

• Genting Singapore (GENS) remains in a strong financial position with net cash balance of S$3.0bn (c.S$4.0bn of cash and restricted cash less gross debt of S$1.0bn).

In discussions with partners and local authorities in Japan

• Genting Singapore (GENS) guided that it remains in discussions with local authorities and potential partners on its plans for an integrated resort (IR) in Japan.
• Thus far, only the Osaka authorities have officially announced their intention to host an IR in its city, with Yokohama and Tokyo not having made any official pronouncements.

No updates to redevelopment plans in Singapore

• Unfortunately, Genting Singapore (GENS) was unable to provide details on its plans to redevelopment its property at Sentosa as it remains in discussions with the local authorities. It remains hopeful that it will be able to share its plans next year.

No share buybacks for now but we see potential for an increase in dividends.

• Despite the correction in Genting Singapore (GENS)'s share price, GENS guided it does not intend to conduct a share buyback as it is still unclear how much funding it requires to develop an integrated resort in Japan.
• In 2014 and 2015, after large falls in its share price, GENS had bought back over S$200m worth of shares between S$0.875 and S$1.15.
• Nevertheless, we believe with a strong balance sheet and growth in earnings, GENS has the capability to reward its shareholders by lifting its annual dividend to 4.0 Scts from 3.5 Scts when its reports its FY18 results early next year.
• Year to date GENS has paid 1.5 Scts interim dividend, we project a final dividend of 2.5 Scts up from 2.0 Scts paid in FY17.

Growing VIP despite macro uncertainty to propel earnings and share price ahead.

• Despite increased macro uncertainty relating to the potential trade war between the US and China as well as impact from depreciation of regional currencies against the SGD which in turn could curtail demand for credit by VIP customers as they lack the confidence to gamble due to pressures on their own business/cashflows, we believe there is still strong prospects for GENS to grow its VIP business.
• Our confidence arises from the fact that GENS VIP rolling chip only stands at US$6bn a quarter and could increase by 50% but still not hit the previous peaks of US$14b-15bn. Furthermore, we believe there is potential for GENS’ market share with Marina Bay Sands to normalise towards the 50% level, from the high 40’s currently.
• Thus, we project 3% p.a. growth in VIP rolling chip over FY19-20F which should translate to a steady 3-5% growth in adjusted EBITDA over the same period which should help propel GENS’ share price higher over time.

Maintain BUY With Target Price of S$1.55

• With 3Q18 results in line with expectations, we maintain our BUY call with Target Price of S$1.55.
• We continue to believe Genting Singapore (GENS) will continue to report a sustained increase in profitability over the next 2-3 years which should result in GENS trading closer to its average EV/EBITDA multiple of 12x.
• Near term, we believe with GENS trading on a EV/EBITDA multiple of 5.5x below its -2SD mean EV/EBITDA of 5.8x, it offers compelling value with a large proportion of risk associated with a potential slowdown in the Asian casino market having been priced in.

Source: DBS Research - 09 Nov 2018