Genting Singapore may shell out $1b in FY2019 capex: analyst

The firm is likely to incur $250m per quarter for land acquisition alone.

As Genting Singapore undertakes $4.5b revitalisation project of Resort World Sentosa, the company may incur around $800m-$1b in related land acquisition costs, according to DBS Equity Research which revised the firm's estimated capex for FY2019 to $1b.

On the amount for land acquisition, DBS notes that the remainder may be spread at around $250m per quarter after construction begins in mid FY2020.

Genting Singapore profits continued to fall steadily throughout the first half of the year as earnings fell 5% YoY to $168.1m in Q2 from $177.6m last year, whilst revenue rose 14% YoY to $636.8m from $560.3m previously. The decrease in profits was due to the slower mass gaming business and to the effects of a slowing local and regional economy.

The dismal profit reading may bely the firm’s resilient operating cash flow of $341m and a solid net cash position of $3.37b following the repayment of $680m in borrowings. “Marked increase in bad debts should be transitory,” DBS said, after noting the impairment on trade receivables of $47.3m which was considerably higher than GENS’s historical average of $10-15m.

“With GENS trading at 6.3x EV/EBITDA (FY19), which is around -2SD of its mean valuation of 11.7x, we believe the company has been overpenalised by the market for softness in its near-term EBITDA and free cash flows, and the current share price is at an attractive level. We remain positive on GENS’ medium and long term growth prospects, and the company deserves to trade at -1SD of EV/EBITDA,” DBS said in a report.

However, the mass market volume remains a challenge as other GENS fundamentals weakened. Although VIP rolling chip volumes came in at around US$6.4b, the mass
market business experienced a 10% drop in volume, data from DBS show, adding that it “maintained a cautious stance on the gaming business amidst growing uncertainty in the macroeconomic environment and competition from regional casinos.”

Despite the positive medium- and long-term growth prospects, Maybank held a more pessimistic view and cut long-term earnings estimates for FY20/21 by 8-10%. Accordingly, whilst earnings and dividends were within expectations, the company’s overall performance weakened as seen in the high-margin mass-market gross gaming revenue (GGR) in the second quarter which fell by 3% YoY and by 10% QoQ. This was attributed to the Singaporean citizens’ and permanent residents’ casino entry levy hike of 50% that came into effect on 4 April.

Likewise, RHB expressed caution on GENS’s outlook and cut their adjusted EBITDA by 3-10% for the next three fiscal years as they expect mass volumes to take more than a quarter or two to recover from the levy hike.

Positive news in the Japanese IR opportunity will drive share prices upward, analysts said. Accordingly, GENS shared that its Request-for-Concept (RFC) registration was officially approved by Osaka’s local government, and the submission for its Phase 2 request-for-proposal is due on 16 September. Both DBS and RHB noted that the earliest Osaka could select an operator is in Q2 2020.
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