Trading/Services: Genting Berhad

Resorts World Sentosa: Bringing Life to the Genting Group~!

Introduction

Genting Berhad is an investment holding company that encompasses interests ranging from casinos, resorts, cruise operation, plantations, property development, oil and gas exploration, and power generation business. The Genting Group is Malaysia’s leading multinational corporation and one of Asia’s best-managed companies. The Group has over 35,000 employees, 4,500 hectares of prime resort land and about 133,000 hectares of plantation land.

The Genting Group is the collective name for Genting Berhad and its subsidiaries, and comprises the following four listed entities with a combined market capitalisation of about RM115.8 billion as at 30 September 2010. It is no longer a gaming company, it is now a giant conglomerate with their core business in the leisure & hospitality segment.

Genting Berhad's Corporate Structure (Principal Subsidiaries)

Fundamental 

1. Does the company have an identifiable durable competitive advantage?

2. Do you understand how the product/service works?

3. What is the chance that it will become obsolete (KO) in the next 20 years?

4. Does the company allocate capital exclusively in the realm of its expertise?

Since ~80% of the group's operating profit is attributed to the leisure & hospitality segment you can refer back to my previous thoughts HERE for question 1 to 3 (they are more or less as relevant). Just to touch up a little, on the 1 July 2010, Genting Malaysia entered into a conditional sale and purchase agreement with Genting Singapore PLC to acquire its casino operations in the United Kingdom (“Genting UK”). Also on 13 September 2010, Genting New York LLC (an indirect wholly-owned subsidiary of Genting Malaysia) was selected as the developer and operator of a video lottery facility at the Aqueduct Racetrack in the City of New York, United States of America. The facility, set upon an area of 413,000 square feet will be known as Resorts World New York.

5. What is the company's financial history and status?

Financial Chart 1

Genting has it share of ups and downs across a 10-year period. Net profit margin (PM) has been in the range of 30% until recently toning down to 20% due to other expenses such as impairment losses on GENM, goodwill arising on acquisition of Genting UK Plc & more bills on power segment. 2 years of slight restructuring & asset adjustments. Looking forward, I see the margin to be within 25% to 30%.

You might be perplexed with the falling revenue growth rates. It is explainable as the prevailing market conditions at that time was around the US sub-prime crisis. Rest assured that year-end 31 Dec 2010 will see Genting's revenue growth rate soar to possible ~40% with help from Genting Singapore. I am fairly confident it is able to get a revenue of RM14bil for 2010 vs previous RM9bil in 2009!

 

Below is the 5-year average for the company. Sector is more broadly categorised like Trading/Services while industry is much more specific; for GENTING is it Gaming. 

• Net Profit Margin: 24.82% vs 7.55% (Industry), 3.48% (Sector)
• Gross Profit Margin: 41.17% vs 53.40% (Industry), 24.10% (Sector)
• ROE: 11.58% vs 12.04% (Industry), 8.87% (Sector)
• Revenue Growth Rate: 13.86% vs 10.95%, 9.08% (compounded annual growth rate)

ROCE is another view point of the returns to shareholder equity without accounting debt being used as leverage. GENTING has been doing well at this point of time managing to par down some short term borrowings and close the gap between real returns. With GENS making a lot of $$, it will be quick and easy for GENTING to settle all outstanding loans. As such I will project a realistic 10% revenue growth rate in my DCF calculation.

Financial Chart 2

Good value creation through growing EPS whilst DPS lags a lot (GENTING does not have a dividend policy) even though it is a cash cow. For year-end 2010, I estimate that GENTING might has some special dividend owing to the the fact that GENS is doing unexpectedly very well. Perhaps we might see something like in 2007 when they gave out special dividend in memory of the late founder Tan Sri Dr Lim Goh Tong.

6. Is the company conservatively financed?

It has RM14.4 billion in cash and cash equivalents mainly denominated in Ringgit Malaysia and Singapore Dollars. There is no question that GENTING has ample liquidity to juggle things around or even go into a hunting spree just like it did for the UK gaming business.

7. Is the company actively buying back its shares?

Yes and is still doing it every now and then considering it has surplus cash in hand.

8. Is the company free to raise prices with inflation?

No such info gathered.

9. Are large capital expenditures required to update plant and equipment?

No as GENTING spends on average RM400mil and with RWS up an estimated another RM400 million for maintenance and upgrades. The large one time capex are from construction of a new resort like Resorts World Sentosa at SGD4.0 billion.

Discounted Cash Flow Analysis

Instead of using the optimistic 15% revenue growth rate, I will either use 10%.

Operating Costs: 70%

Corporate Tax: 25%

Capital Expenditures: RM800 million +3%/year

Depreciation: RM650 million +3%/year

Working Capital Cost: +3%/year for the next 5 years (estimated)

Discounted Rate: 12%, 11% & 10%

 

Genting Berhad is fairly valued at RM9.70(12%), RM10.60(11%), RM12.25(10%). The current trading price of RM10.50 puts it  at a good trading BUY for me right now. One thing that might deter you is the high P/E ratio of GENTING which is at 24x far higher than GENM of 15.94. Industry is only at 16.99 while sector at 10.25. It is important to note that P/E ratio is not everything or a magic number when it comes to fundamental investing.

What a waste that I did not get it before GENS earnings came out (early 2010)

Conclusion

The Good
-Cash cow. With that much cash, it can do many things like acquisitions.

-The only licensed casino operator in Malaysia & also is now the biggest gaming operator in UK.

-RWS won't bite Genting Malaysia as it serves a different market (which is proven by quarterly reports HERE).

GENM revenue not affected by GENS

-Genting Singapore is doing amazingly well, capable of taking market share from Macau and rivaling casinos there.

The Bad
-Poor dividend yield of roughly 1% and there is no dividend policy. Thus returns have to come mainly from share appreciation in the long run.

-Same as GENM, competition is stiffing up as many casinos are being built throughout Asia but as Integrated Resort player, they are the best in the world.

Though you may argue that I have overlooked GENTING's other segments such as Power and Plantation, I have no problems with both of them. Consider this, Plantation operations are in East Malaysia (70% Sabah) and Indonesia. Half the acres are still unplanted with future potential, plus CPO prices are expected to increase over RM3000 per MT. Genting also has a biotechnology division working in oil palm genomics to improve yield, one of the only folks in Malaysia to do so.

 

As for power side, GENTING has seven power plants in Malaysia, China and India generating about 1,450 MW of electricity. Not a lot but able to provide steady recurring income. Revenues can be affected through big shifts in coal prices but not to a big degree to be afraid.

Like has been said, what a better time to divest GENM (share at highs) and stock up on GENTING. When the year's end 2010 financial report is out, the new record profit that GENTING is going to announce will blow many people resulting in bullish taking, all thanks to a successful venture into Resorts World Sentosa. It is not my nature to guess because it feels like speculation but I think GENTING share price will soar to RM13+ range by early months of 2011 unless there is another global problem. We will see then :)