Will Genting Singapore's Japan IR gamble pay off?

SINGAPORE (Nov 8): On the surface, luck could be running out for Genting Singapore (GENS).

The integrated resort operator saw its earnings fall 24% to $158.9 million for 3Q19 ended September, revenue for the quarter slipped 7% to $596.1 million on the back of an 11% decline in revenue contribution from the gaming segment to $360.8 million. 

See: Genting Singapore posts 24% drop in 3Q earnings to $159 mil on lower gaming revenue

While the group say its latest results were due to a “confluence of headwinds”, it notes that it continues to be positive in attracting the affluent market from the region and leverage on the growing Asian economies.

Analysts, on the other hand, have mixed views on the situation. While some remain cautious about challenges that will continue to put pressure on revenue and earnings figures, others see some glimmers of hope for the group. 

Gaming revenue a recurring concern 

Firstly, analysts are quick to point out the decline in gaming revenue for the group could well be a cause for concern for the group in the near future. In a Friday report, RHB Group Research analyst Juliana Cai notes that mass gaming volumes were negatively impacted by the increase in casino levy for Singapore citizens and permanent residents.

“Although Genting Singapore saw incremental growth in foreign patrons, this was unable to offset the decline,” says Cai. “While we expect 3Q19 VIP volume to grow at mid-single digits y-o-y, this too was insufficient to pull up overall gaming revenue – as the group recorded a weaker VIP win rate of 2.7% this quarter [compared to] 2.9% in 3Q18.”

Maybank Kim Eng analyst Yin Shao Yang agrees, noting that the levy continues to weigh on mass-market gross gaming revenue (GGR). 

“As more SCPRs’ $2,000 annual passes expire, [they] will have to pay a much higher $3,000 if they wish to renew their annual passes. We fear many will not, exerting more pressure on mass-market GGR going forward,” says Yin in a Friday report. 

“While we raise our EBITDA estimates by 7-8% per annum, we fear it may be fleeting if the y-o-y fall in mass-market GGR accelerates,” adds Yin. 

Uncertainty moving forward

Market watchers are also exercising caution on GENS, citing numerous risks that could dampen the company’s prospects in the near future. 

Yin, for one, attests that although the brokerage forecasts FY19/20 mass-market GGR to ease by 7% and 6% respectively, it may cut its earnings estimates “markedly” should the actual decline be wider than expected. 

“We estimate [that] even 1 percentage point reduction in mass-market GGR growth will trim our earnings estimates by 1.2-1.5 percentage points,” says Yin. 

“Currently, GENS’s higher mass market is slumping, impairment of trade receivables is inching up, and tax rates will be hiked in the near future,” he adds.

And while Maybank is poised to slash forecasts, DBS Group Research has taken to adjusting its forecasted figures for the group’s mass business, on the back of the recent increase in the entry levy, as well as aggressive marketing efforts by other regional casinos. 

“Other markets in Asia including Macau, Philippines, Vietnam, Cambodia and potentially Hainan Island have been developing new integrated resorts which may draw GENS’s customers away,” says DBS analyst Jason Sum. 

“We project [a] 10% dip in FY19 versus 2-3% increase previously,” adds Sum.  

Japan IRs a potential trump card

GENS is one of the three bidders for an integrated resort (IR) in Osaka, and is also preparing for a request-for-concept in Yokohama. The management believes that the former will be announcing its winner sometime in 3Q20, and the latter in 4Q20. 

Sum is especially bullish on the group’s ability to deliver on these bids, noting that GENS is one of the frontrunners for the Osaka project. 

“We believe the market has yet to appreciate GENS’s optionality,” says Sum. “GENS’s extensive experience in operating an IR in Singapore is highly advantageous as Japan has drawn many lessons from Singapore in establishing gaming laws and regulations, and the introduction of safeguards to limit negative social impact,” adds Sum. 

“We remain constructive on GENS’s long-term growth plans, and believe that these will help underpin sustainable earnings growth,” says Sum. 

And although it might take some time GENS to obtain a casino license from the Japanese government, Cai ascertains that this could work in the group’s favour. 

“It could take 6- 12 months to get the casino license from the Japanese government. As a result, the group believes it will not need additional funding until 2022,” says Cai. 

On the back of a mixed outlook for the group, both RHB and Maybank Kim Eng are maintaining their “hold” calls on Genting Singapore, with unchanged target prices of 97 cents and 99 cents respectively. 

Meanwhile, DBS is more upbeat on the group, and is keeping its “buy” call on the back of the stock’s attractive entry point, with an unchanged target price of $1.20. 

“The stock is trading at 7.0x (FY19) EV/EBITDA, which is at -1.5sd below its historical average, and considerably below regional peers’ median of 12.8 times,” says Sum. 

Shares in Genting Singapore closed two cents lower, or 2.1% down, at 94 cents. This implies a price-to-earnings of 16.5 times and a dividend yield of 3.5% for FY19F according to DBS valuations.