Genting SP

OCBC on 16 Apr 2012

Genting Singapore (GS) is offering up to S$500m worth of perpetual subordinated capital securities for retail investors at 5.125% per annum; this following the very well-received issue of similar securities to institutional investors last month. While the securities are perpetual, we believe that GS has the ability to redeem them, given its strong cashflow generating business; it also has the incentive should the interest rate environment stays low. Meanwhile the presence of a dividend stopper feature should help allay fears of any potential deferment in interest payments. We are generally positive on the issuance as it will further boost GS’s growing cash hoard for potential overseas investments, potentially via acquisitions or Greenfield projects in Japan or South Korea. As such, we maintain our BUY rating and S$2.02 fair value.

Issuing up to S$500m of perpetual securities
Genting Singapore (GS) is offering up to S$500m worth of perpetual subordinated capital securities for retail investors; this may be increased by another S$200m in the event of over-subscription. Issued in denominations of S$1,000 each (minimum subscription of S$5,000), the securities will pay a distribution rate of 5.125% per annum (cumulative; payable twice a year on 18 Apr and 18 Oct); and this rate will increase to 6.125% per annum if the securities are not redeemed on 18 Oct 2022.

Why perpetual securities?
First is the ability to treat the perpetual as “equity”, which would not only increase its NTA (and overall balance sheet strength), but also not lead to deterioration in its net gearing ratio. But most importantly, the perpetual offers GS flexibility in managing its financials, given that the perpetual is callable after 5.5 years on every interest payment date.

Ability to redeem is strong
We believe that GS has the ability to redeem the perpetual, as RWS is likely to be free of debt in 2017; and it should be able to generate some S$1.2b of free cashflow per year. And should the interest rate environment remains low, GS will also have the incentive to redeem the perpetual. Meanwhile, concerns of GS deferring interest payment are likely overdone, given that the perpetual comes with a dividend stopper feature i.e. GS cannot pay dividends if the interest payments are not made. Since GS has already started to pay dividend last year, it is likely to want to continue paying dividends.

Maintain BUY with S$2.02 fair value
We are generally positive on the issuance as it will further boost GS’s growing cash hoard for potential overseas investments, potentially via acquisitions or Greenfield projects in Japan or South Korea. As such, we maintain our BUY rating and S$2.02 fair value.