Genting Singapore

CIMB Research, May 6

Q1 FY2014 core EPS came in line with our expectation and above consensus at 29 per cent of our full-year forecast and 31 per cent of consensus FY2014 EPS.

Genting Singapore reported a record quarter in VIP rolling chip which is unlikely to be sustainable, but the key underlying growth in VIP gross gaming revenue (GGR) and market share gain is clearly apparent and a key potential catalyst for the shares. The other key potential catalyst is the execution of the US$2 billion Jeju joint venture (JV). When it opens in Q1 2017, it will be well-positioned to tap the North China market which we estimate will be the same size as Asean's US$10 billion GGR.

We keep our EPS forecasts. We maintain our "add" recommendation and RNAV-based target price of S$1.81.

Q1 FY2014 core earnings registered 71 per cent y-o-y growth on the back of the operating leverage from VIP GGR, which came in at an estimated S$704 million for the quarter on a rolling chip record of S$23.5 billion which was up 10 per cent y-o-y and 19 per cent q-o-q.

Although the volatility of the business is likely to remain high because of regional and macro events (elections in Indonesia and a slowdown in China's growth), the underlying trend in GGR and market share gain is positive (from 49 per cent of VIP rolling chip in Q1 2012 to 59 per cent in Q1 2014) and reflects the broadening out of its customer base beyond Mainland Chinese PRs to Asean high-rollers.

This is consistent with our recent visit to Macau where one of our key takeaways was that Asean VIPs were being increasingly relegated in status (they are only offered a rebate of 1.15 per cent versus the 1.25 per cent norm, and credit is no longer as readily available following the recent Huang Shan incident). The Genting group's Asean VIP database is arguably the strongest and it will not be surprising if this segment sees a resurgence across all of its properties in 2014.

The hurdle rate on the US$2 billion JV is expected to be much lower as half of the capital expenditure is expected to be funded by property sales. We have not factored this into our Jeju valuation which is worth S$0.09 in our RNAV, assuming a 15 per cent ROCE (return on capital employed).

We upgraded Genting in November last year on the twin catalysts of an earnings recovery and balance sheet potential. Both factors are emerging in 2014. The stock trades at 11 times 2015 EV/Ebitda (enterprise value to Ebitda), and the 21 per cent discount gap to Macau could start to narrow.

ADD