• Genting Singapore's 4Q18 adjusted EBITDA of S$294m (+15% y-o-y) below expectations. 
• Higher than expected depreciation and overheads. 
• On a positive note, 4Q18 VIP rolling up 10% y-o-y with higher than normal 3.4% VIP win rate. 
• Final dividend maintained at 2cts was a disappointment. 

Trading Below -1SD EV/EBITDA

• We maintain our BUY call on GENTING SINGAPORE LIMITED (SGX:G13) with a revised Target Price of S$1.54.
• While Genting Singapore’s share price has partially recovered from the correction in 2H18 which was caused by fears over slowing gross gaming revenues (GGR) in Macau and potential slowdown in China which in turn will negatively affect Genting Singapore’s VIP business, we believe the majority of these concerns have been priced in as Genting Singapore still trades on an EV/EBITDA of 7.7x, below -1SD EV/EBITDA of 8.6x.

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

• Consensus’s Target Price implies an EV/EVITDA multiple that is below Genting Singapore’s average multiple of 12x. We believe Genting Singapore deserves to trade at its average EV/EBITDA multiple given a sustained earnings recovery outlook.
• Furthermore, the reasons why Genting Singapore 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 Genting Singapore’s earnings recovery.
• We believe as we progress throughout 2019, as Genting Singapore 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 Genting Singapore’s share price.
• We believe there is upside potential to Genting Singapore earnings as its VIP rolling chip only stands at US$6bn a quarter versus a peak of US$14b-15n.

What's New - Overall Still on Track

4Q18 results impacted by higher overheads and depreciation

• Genting Singapore reported 4Q18 adjusted EBITDA of S$294m (+15% y-o-y) which was below our S$312m estimate. The underperformance was largely due to higher overheads (administrative and selling expenses rose 33% y-o-y) which was partially related to costs associated with bidding for a Japanese integrated resort (IR).
• Nevertheless, despite the slightly disappointing 4Q18 results, FY18 adjusted EBITDA rose 7% y-o-y to S$1,230m, continuing the recovery in earnings from the lows of FY16 when adjusted EBITDA only stood at S$779m.
• On the back of an improvement in adjusted EBITDA, 4Q18 normalised profit (excluding exceptional items) improved 11% y-o-y to S$149m. The underlying profit could have been better if not for higher depreciation (S$30m y-o-y increase).
• We understand the higher depreciation is a result of management’s decision to reduce the useful life of some of its assets. We believe this is a positive signal that Genting Singapore is close to finalising plans to refresh its Resort World Sentosa property, although it is still not able to disclose them.

Sustained improvement in VIP rolling chip volumes

• The growth in earnings over 4Q18 and FY18 was mainly driven by the VIP business, with 4Q18 and FY18 VIP rolling chip volumes doing much better than expected coming in at US$6.1bn (+10% y-o-y) and US$25.3bn (+24% y-o-y). We had conservatively assumed 4Q18 rolling chip volumes would fall by 12% y-o-y.
• We understand Genting Singapore continues to selectively extend credit and growth this quarter was driven by customers from South East Asia with some increase from Chinese customers although the Chinese segment is competitive given the various casinos around the region.
• Genting Singapore in 4Q18 also benefited from a favourable VIP win rate of 3.4% above the theoretical win rate of 2.85%, 2.9% in 3Q18 and 2.7% in 4Q17.
• Going forward, we continue to believe there are still better days ahead for the VIP business given quarterly VIP rolling chip volumes are tracking US$6bn, only up from lows of US$4.5bn in 2Q17 but still less than half of the US$14-15bn recorded during the peak years. With management focused on selectively extending credit and growing its VIP business, we have conservatively assumed 3% p.a. growth in rolling chip volumes over the next 2-3 years.

Jump in bad debts but still under control

• Genting Singapore's 4Q18 bad debts jumped to S$36m from S$4.7m in 4Q17 and S$13m in 3Q18.
• While this may concern some investors, Genting Singapore guided that impairment on trade receivables can be volatile quarter to quarter. However, it remains under control with bad debts of S$58m in FY18 only marginally up from S$48m in FY17 but substantially down from S$235m recorded in FY16.
• Going forward, we understand bad debts should be maintained at the S$14-15m per quarter run rate seen in FY18.

Dip in market share for the mass business

• We understand market share for the mass business dipped to 39% from low 40’s recorded in 4Q17. This resulted in gross gaming revenue (GGR) for the mass business dropping by an estimated 7-8% y-o-y in SGD terms in 4Q18. However, for the whole of FY18, GGR was stable y-o-y. The softer year end performance could be due to impact of weakness in regional currencies over the quarter and impact from competition casino’s outside Singapore.
• Nevertheless, with the addition of 789 new hotel rooms on Sentosa in 2019 and greater coordination among the hoteliers on the island to attract more conventions and meetings to the island, we remain optimistic that a greater number of guests coming to Sentosa should translate to more visits to Genting Singapore’s facilities and drive both the mass and VIP business.

No increase in dividend despite strong financial position

• Genting Singapore declared a final dividend of 2 Scts taking the full year dividend to 3.5 Scts.
• This was disappointing as we had hoped that Genting Singapore would raise the FY18 DPS to 4 Scts given its strong financial position with net cash balance of S$3.3bn (S$4.3bn of cash and restricted cash less gross debt of S$1.0bn). We understand Genting Singapore will review its dividend policy later in the year after finalising its cash needs and plans for any potential IR development in Japan.
• With Genting Singapore previously guiding that it may consider partnering with local Japanese companies to bid for an IR which would reduce its capital requirements, and realising S$800m-S$1bn in annual free cash flow, we have penciled in an increase in DPS to 4 Scts for FY19.

Potential bidding for Japan IR in 2H19

• Genting Singapore guided that it remains actively engaged in a potential bid for an IR in 2H19. To date it has opened an office in Japan to facilitate its efforts.

Maintain BUY With Revised Target Price of S$1.54

• Despite 4Q18 results coming in below expectations resulting in a 1-2% cut in our FY19-20F adjusted EBITDA and trimming of our DCF-based Target Price to S$1.54 from S$1.55, we remain our positive on Genting Singapore’s prospects and maintain our BUY call.
• We believe Genting Singapore will continue to report a sustained increase in profitability over the next 2-3 years on the back of steady 2-3% growth in Genting Singapore's VIP and mass business.
• Combined with potential upside to Genting Singapore's DPS, this should translate to Genting Singapore trading closer to its average EV/EBITDA multiple of 12x, from 7.5x currently which is below -1SD EV/EBITDA multiple of 8.6x.

Key Risks to Our View

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

Source: DBS Research - 22 Feb 2019