Genting Berhad Dec 2012

Updated Profile
The leisure and hospitality giant now has operations in Malaysia (and has proxy to Resorts World Manila via GENM), Singapore in Sentosa Island, UK being the biggest operator controlling 44 casinos and the USA by opening Resorts World New York in October 2011. It is now looking to expand in Japan and South Korea. Genting is now considered a global major player in the gaming industry. 

Fundamentals

Net profit margin (red) is in line with expectation of 25% to 30%. Revenue jumped from RM9 billion to RM15.2 billion in 2010 and for the year 2010 to 2011 it also grew from RM15.2 billion to RM19.6 billion supported by operations in GENS. This explains the explosion in growth rate (orange). 

5-year average financials comparison (Genting vs Industry vs Sector). Sector refers to Trading/Services while industry is more specific; Gaming. Sector is rather general can be ignored safely but is listed here for reference sake.

#Valuation Ratios
P/E Ratio High Last 5 Yrs: 26.10 vs 51.94 vs 30.48
P/E Ratio Low Last 5 Yrs: 13.58 vs 19.00 vs 9.42
-Genting's PE ratio is reasonably low and is one indicator it is undervalued.  

#Growth Rates
Sales 5 Yr Growth Rate: 24.96% vs 7.57% vs 8.84%
EPS 5 Yr Growth Rate: 13.42% vs 5.52% vs 17.80%
Capital Spending 5 Yr Growth Rate: 49.39% vs 2.40% vs 4.33%
-Explosion in revenue due to GENS as expected.

#Profitability Ratios
Gross Margin 5 Yr Avg: 40.64% vs 55.89% vs 27.11%
Net Profit Margin 5 Yr Avg: 22.96% vs 7.31% vs 6.08%
-Genting's profit margin has been steady between 20% to 30% as evident from my chart above.

#Management Effectiveness
ROA 5 Yr Avg: 7.23% vs 4.63% vs 6.57%
ROE 5 Yr Avg: 12.88% vs 10.32% vs 12.28%
-Genting has better management team vs competitors.

*I skipped Dividends and Financial Strength for the Risks section later.
For more financial comparisons refer to Reuters (click here). For my original posting back in Oct 2010 (click here).

Genting continues to show good value creation on its EPS, however it has not announce a dividend policy yet and prefers to use its fund for in-house expansion (potentially Japan and South Korea).

Discounted Cash Flow Analysis

Projected Revenue Growth Rate: 5% (for 2012) and 8% for the years ahead

Operating Costs: 70%

Corporate Tax: 25%

Capital Expenditures: RM5 billion +3%/year 

Depreciation: RM1.5 billion +3%/year

Working Capital Cost: same as projected revenue growth rate

Discounted Rate: 15% 

Genting's fair value is anywhere between RM12.27 to RM14.27 as such I put it as RM13.22. As long as Genting continues to pump funds into capital expenditure causing high Net Investment (12%), valuation will be slightly hampered. Historically it was a modest percentage of 5 until the company went into high gear expansion mode after the son took over the business.

Technical Analysis

In the near term (3 months) GENTING should be bullish unless it challenges the support line at RM9.15. Having said so their financial year reporting for 2012 might has some impact on the trend, we will see.

Investor Risks
#1 Macau casinos (all six big boys) are entering their 2nd phase of expansion and this time encroaching into the mass market as the lucrative VIP market saw a marked decline in both Macau and Singapore. Because Macau has more casinos compared to Singapore it has more appeal.
#2 Monetary Authority of Singapore is continues to allow gradual appreciation of the Sing Dollar to combat inflation making it more expensive for lodging and gaming in the city state.
#3 Genting is looking to further expand in Japan and South Korea and has made those plans public. No dividend policy is expected to be announced and the potential for higher gearing is also expected. DE ratio currently is manageable at 0.80 down from 0.97 back in 2009. 

Conclusion
Singapore will continue to count on high tourist numbers to drive consumption within the country. This is business as usual for them and having the same interest will bode well for Genting. Genting Singapore is now the main revenue contributor for the group having almost a 50% share of it and its performance is to be closely watched. With the company's estimation of an increase of 1 million tourist to RWS for 2013 to 17 million people, revenue is expected to increase. Most research houses (click here) are putting a BUY call on Genting with an average target price of RM10.88 and as mentioned earlier their target price could be hampered by the high capital expenditure Genting is pumping for expansion and will continue for the coming year. Following recent assessments and revised DCF figures Aboi puts GENTING as:

Target price: RM13.22 BUY
Fundamentals: Long Term Outperform (5-year period)
Technical: Short Term Bullish (3-month period)
Risk Level: Medium-High

Disclaimer: The reports, analysis and recommendations in this blog are solely my personal views. I do not link to any investment body or company. As such, I will not be responsible of any of your investment decision. Consult your investment adviser or come to your own conclusions before making any investment decision.