Genting Singapore says the capex for the upgrade and expansion of Resorts World Sentosa (RWS) has hit $6.8 billion. This is significantly higher than the $4.5 billion indicated in April 2019.

The multi-billion upgrades to be undertaken at RWS and Las Vegas Sands’ Marina Bay Sands are part of the expansion-for-exclusivity deal these two integrated resort operators signed with Singapore.

“We are confident that this investment will firmly anchor RWS as the most sought-after tourism destination in Asia and propel the group’s strong future growth,” says Genting Singapore on Nov 10.

Among the highlights is The Waterfront, a development comprising around 700 hotel keys in a “captivating blend of biophilic architecture” that is expected to transform Singapore’s skyline and form a gateway to RWS and the new Greater Southern Waterfront precinct.

Other new attractions include Minion Land in Universal Studios Singapore and the Singapore Oceanarium. The Forum, the central retail and F&B area of RWS, will undergo a “transformation” too.

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Some analysts have wondered if the $6.8 billion capex, which takes into account higher construction costs after the pandemic, will result in a lower return on capital versus the initial development of the resort. Investors also worry if the higher capex would affect their dividend payout.

At the company’s AGM on April 19, Genting Singapore CEO Tan Hee Teck explained the need to refresh and expand the resort. “We must reposition ourselves by catering to the wealthier market segment of visitors. We have to transform ourselves to be a better product,” says Tan.

“This $4.5 billion has to be funded from somewhere,” adds Tan, when asked why Genting Singapore did not pay dividends higher than the three cents it declared for the whole of FY2022 even as it sits on a cash balance of more than $3 billion.

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The higher capex was announced together with Genting Singapore’s better-than-expected 3QFY2023 ended September results on Nov 10, where earnings increased by 59% y-o-y to $216.3 million, even as tourist arrivals to Singapore have yet to recover to pre-pandemic levels.

“This suggests a substantial increase in the average spending per visitor at RWS. 3QFY2023 also marks the first instance of Genting Singapore reporting gaming volumes and ebitda that surpass pre-pandemic figures,” says DBS Bank analyst Jason Sum.

Sum believes further earnings growth can be generated with better accessibility to Sentosa, the addition of more gaming areas and hotel capacity, and new and refreshed attractions as well as retail and dining options.

“Additionally, top-line growth and operating margins could surpass expectations if Genting Singapore successfully executes its strategy to attract more premium mass-market customers,” he adds.

While he remains cautious about how the higher-than-expected capex will affect the longer-term return on capital, the analyst finds the risk-to-reward profile attractive. “We believe this risk is adequately priced in,” says Sum, who has upgraded his call on the stock, deemed “compelling” at current levels, from “hold” to “buy”, along with a higher target price of $1.05, from $1 previously.

CGS-CIMB’s Tay Wee Kuang is similarly upbeat about the stock. “We think that Genting Singapore’s strategy to premiumise its offerings is paying off, given 3Q23’s profitability surpassing 3QFY2019’s despite Singapore seeing 20% lower tourist arrivals.

“This also suggests that the Singapore tourism landscape has shifted towards attracting a greater proportion of wealthier tourists, which justifies its revised $6.8 billion capex budget over the next eight years,” says Tay, who has kept his “add” call and $1.30 target price.

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Citi Research’s George Choi and Ryan Cheung called Genting Singapore’s 3QFY2023 results a “solid beat” but to take into account the higher capex of $6.8 billion, they have trimmed their target price from $1.26 to $1.20 while keeping their “buy” call. Choi and Cheung estimate that Genting Singapore has already spent some $1.6 billion to date and that investors have already priced in the increase in capex.

They note that Genting Singapore is trading at around 5.7x FY24 EV/Ebitda, which is more than 1 s.d. (standard deviation) below its historical average of 7.9x. A possible dividend hike from 3 cents paid for FY2022 to 4 cents for FY2023 is another reason for investors to buy this stock, they add.

Yin Shao Yang of Maybank Securities, meanwhile, notes that both the mass market and VIP gaming segments have done well and exceeded pre-pandemic 3QFY2019 levels and the high-margin VIP segment enjoyed “broad-based” growth and was not reliant on “any one source”.

The higher capex, says Yin, is slated for spending up till FY2031 instead of FY2028–FY2029 as previously indicated. Besides keeping his “buy” call, the analyst has raised his FY2023 to FY2025 core earnings estimate by 12%–6%, thereby raising his target price to $1.16 from $1.12.

Jack Goh of UOB KayHian is similarly positive about the counter and is looking forward to the expansion plans. “We retain our view that RWS’s ongoing revamp will allow it to capitalise on the thus-far sustained higher spending per capita at the integrated resort, with the premiumisation being led by its non-gaming segment,” says Goh in his Nov 14 note.

“Spending per capita has also risen markedly since Singapore emerged from the Covid-19-related lockdown, with spending at the theme park and average hotel room rate rising around 20% and more than 50% from pre-pandemic levels,” he adds.

Goh believes that with the pandemic-related disruptions coming to a tail end, the management now has more flexibility to better utilise its sizeable capital which includes net cash of $3.4 billion, which works out to 28.6 cent cents per share.

“After dropping its decade-long pursuit of clinching a pricey Japan IR concession last year, and with no new compelling projects to consider, we also do not rule out Genting Singapore exploring potential brownfield and greenfield opportunities in the region,” says Goh, who has kept his “buy” call and $1.25 target price.

Genting Singapore shares closed at 96 cents on Nov 15, up 12.9% since the 3QFY2023 announcement on Nov 10.

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