SINGAPORE (May 4): DBS Group Research is downgrading Genting Singapore to "hold". This comes after slashing EBITDA figures for the casino and hotel operator due to the brokerage's expectations of a longer J-shaped recovery, attributable to a larger drop in tourist arrivals, extended social distancing measures, and a sharper contraction in Singapore's economy. That said, Genting Singapore still enjoys an attractive valuation and relatively strong performance compared to its regional peers. 

“In our view, the risk to reward set up is neutral after the significant 54% rebound in Genting’s share price from its bottom in March, as the brutal hit to its earnings over the next two years is largely counterbalanced by its attractive dividend yield and compelling valuation,” remarked analyst Jason Sum, “We will be staying on the sidelines until the regional COVID-19 situation stabilises, and cross-border travel restrictions in the region loosen.”  

DBS has cut its FY20F/21F EBITDA by 40% and 22% respectively to $351 million in 2020 and $760 million in 2021. The new figures constitute a 70% and 39% reduction respectively for pre-Covid-19 estimates and reflect the Research House’s current prediction of a “J-shape” recovery fuelled by a more severe drop in tourist numbers, extended “circuit breaker” measures and a deeper contraction in the Singapore economy. 

“Our economists now project a sharp 5.7% contraction in Singapore’s 2020 GDP, marking the darkest year for the Singapore economy since independence, while unemployment rate could rise to 3.6% by the end of the year, from 2.3% in 4Q19,” warned Sum, who noted that discretionary expenditure on Genting’s casinos and attractions would likely be adversely affected. This figure exceeds initial MAS estimates of a 1-4% contraction this financial year.  

“We believe that a full-fledged recovery will come in 2022 at the earliest, given that social distancing practices could well remain in place beyond 2020 to ensure that the situation remains under control,” Sum added, noting that Genting’s smaller approved gaming area compared to regional competitors (which are often 50-80% larger) could make social distancing difficult to implement on the gaming floor and impact user experience due to longer waiting times. 

DBS anticipates a 65% market volume rebound each in mass gaming and VIP gaming operations in 2021 following an anticipated economic turnaround. Yet pent-up travel demand post-2020 could also be constrained by weak economic conditions and more stringent travel restrictions implemented unevenly on a bilateral basis.

To date, Covid-19 infection curves show no signs of flattening in key regional markets like Indonesia (15.7% of total international visitor arrivals in 9M 2019), India (7.5%) and the Philippines (4.2%). 

EBITDA figures have also been affected by the high operating leverage of the casino business, despite the government’s Job Support Scheme, property tax rebates and senior management pay cuts helping preserve cash flow resilience. DBS has narrowed its EBITDA margin estimates to 35% in FY20 from 48% last financial year. 

With a net cash position of around $3.7 billion and operating cash flows of $800 million to $1.2 billion, Genting is in a relatively healthy financial position, especially if it wins integrated resort development rights in Japan. “We expect bad debt impairments to remain under control and stay at around $15 million/quarter (lower than usual run-rate of $20 million/quarter), underpinned by its stricter credit extension policy and restraint in attracting [an] excessive number of high rollers, and sharply lower VIP volumes.”

Sum reckons that the economic fallout on Genting’s near-term earnings and the more cautious outlook have been adequately priced in. Despite the firm’s present lack of catalysts and significant downside risks of a longer than expected pandemic and a “hard landing” in China, the firm’s consistent and attractive 4.5-5.1% net dividend yield means that the stock is still a good inclusion in investors’ portfolios.

DBS has therefore maintained its “hold” recommendation while lowering its target price to $0.75 from $0.785 with a 4% downside. 

At 1.10 pm, Genting Singapore was trading at $0.76 with a price-to-earnings (P/E) ratio of 13.23 and a dividend yield of 4.64%. DBS calculates that the stock is trading 15% down YTD-2020.