Genting unleashes its war chest, enters Las Vegas

Genting Berhad is an investment holding and management company. The principal activities of the subsidiaries include leisure and hospitality, gaming and entertainment businesses, plantation, the generation and supply of electric power, property development and management, tours and travel related services, genomics research and development, investments and oil and gas exploration, development and production activities. The principal activities of the Company's associates include the generation and supply of electric power, resort, property investment and property development. The Company has over 4,500 hectares of prime resort land and about 134,000 hectares of plantation land.

Stock Rating: OUTPERFORM (BUY NOW)

Price: RM9.46

Target price: RM12.60  

based on average PE 18 due to monopolistic position

Fundamentals: Long Term Outperform (5-year period)

Technical: Short Term Bullish (3-month period)

Risk Level: Medium-High

**Outperform: Stock expected to do better than market return; has upside or cheap vs target price. Usually a buy call.
**Market perform: Stock expected to be on neutral, can be + - 3% to 5% either way; Usually a hold call.
**Underperform: Stock expected to do worse than market return; has downside or too expensive to buy vs target price. If fundamentals change a sell call.


Fundamental Analysis

Revenue/EPS: CAGR of ~7%. Turnover growing steadily ever year as evident from growing EPS.
Dividends: Roughly 1% and no dividend policy. Genting is a capital gain investment.
Debt-to-equity Ratio: 0.80. On the high side but still less than 1.
Liquid asset-to-share Ratio: 3.84! Has a tremendous amount of cash in hand. Nullifies the debt side ratio.
Return on Capital Employed: Performing at ~15%. Anything amount above 10% is good.
****For more information download my worksheet from my dropbox: Aboi_Hybrid_PEGGY_method

EPS growth correlates increasing share price with PE range of 10-18

Technical Analysis

VSA Shakeout - signs of strength
This is intended to remove many investors and traders from the market, obviously all those un-pros. News will be bad and this is used by the pros to panic people out of their positions. Usually after a shakeout the market will move sideways with low volume because the pros would try to buy as much of the stock as they can, without significantly putting the price up against their own buying. This stage is called the accumulation phase; some last for a few days, I have seen some for weeks.

VSA Stopping volume - signs of strength
This results from buying orders from market professionals which are large enough to stop a down move. Seen as a high volume down day but usually closing in the middle or the highs. Stopping volume is a point where demand overcomes supply.


In The News
With its RM 21 billion in cash war chest and eyeing the growing influx of Chinese and other Asian tourists to Las Vegas, Genting plans to start construction on a new multibillion-dollar casino complex called Resorts World there next year. If Genting goes through with the project, it will be the first major casino initiated in the wake of the economic downturn of 2008, a potentially major milestone for Las Vegas that could usher in a new era of opulent buildings—or hasten the decline of others.

Genting intends to build a multi-billion dollar casino with 3,500 hotel rooms, a convention center and a 4,000-seat theater. The company is spending $350 million on the purchase, or $4 million an acre. The price is among the lowest in a decade for Strip property. That means the resort corridor is still far from the days in July 2007 when a developer spent nearly $34.7 million an acre for empty land. What a bargain! $4mil (now 2013) vs $34.7mil (pre-crisis). 

A person familiar with Genting's thinking said the company is finally striking in Las Vegas in part because it sees a rise in visitors and spending involving Chinese travelers. Genting may have an advantage in attracting them because it operates casinos in Singapore and elsewhere that attract Chinese gamblers. Yet unlike three of the four major Las Vegas casino companies, it doesn't have a presence in the most important gambling market in the world—China's gambling enclave of Macau.

The Genting conglomerate opened its first casino in 1971 in Malaysia and now operates sites in New York state, the Philippines, United Kingdom, Singapore, and the Bahamas. Genting is also in the top 1000 companies of Forbes Global 2000 ranking. Other recent news: Genting's 4Q within expectation

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.

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.

2011 Equities Reevaluation Part 1

Araya Hargate

Trading/Service: Genting Berhad
Results from annual report 2010 is impressive as expected. Previous DCF target price of RM12.25 is now revised to RM14.05 backed by encouraging outlook of the tourism-related sectors in Singapore. With the global economy in an almost stalemate climate, SG's 2Q11 economic indicator shows a yoy% increase of 3.3% for the services sector while the rest draw blanks (manufacturing @ -5.5% and construction @ 1.6%). Although the services sector has been in the downtrend since 2Q'10, tourism was not the cause of it. Wholesale and retail trade were weaken by trade flows while financial services sectors lag due to sluggish stock activities. Nothing beats the source from the ground and with many Malaysians situated in SG, many of my friends can attest that tourism is a booming industry in SG. Other source: MIDF Equity Beat.

As usual I'm ignoring other segmental info of GENTING (power, plantation, O&G and properties) because it is negligible; contributing only 18% of revenue though I do wish they exit from power generation. This is because the prices of raw materials for power generation such as coal is increasingly volatile and will be as the world struggle more with its power needs. GENTING remains my most favourite long-term (>5 years) pick and is a 5-star choice and SOLID BUY. The biggest risk I see is over expansion which leads to either too much debts OR losing focus; for now this is still in the region of being medium. And I have yet to visit Resorts World Sentosa, I plan to do so one day.

GENTING Chart 1

GENTING Chart 2

Trading/Services: Parkson Holdings Bhd
Parkson added 3 stores in China, 2 in Malaysia and 1 more in Vietnam. Because Parkson China remains the main contributor to the Group's result (71% of revenue & 91% of OP) I tend to overlook Malaysia (which does not have good long term economic outlook) and meager Vietnam due to this. Retail spending has increased 15% over the year, with GDP @ 10% and Parkson China registered store sales growth of 11%, I am optimistic and convinced that Parkson has a grip and strong presence in China's Tier 1 cities. Unlike MAMEE which made a mistake of going into China all by themselves, PARKSON went by proxy just like JOBST which is proving successful. Other healthy indicator includes another year of down trending D/E ratio; evident with rising ROCE.

This time I removed gains on partial disposal of subsidiary for Parkson China; the chart shows it all. Revenue growth rate is expected to balance itself between 5% to 10% as you remembered in my previous analysis that Parkson turned pure retail in 2007. PARKSON is another good pick for the long-term (>5 years) as China's middle class is expanding tremendously and has been for the pass decade. A 4-star choice and GOOD BUY. The risk I see would be the bubbling of China property market; if it goes boom it could spell lacklustre consumer spending like we see in the US. A medium to high risk region. Pay attention to the AR 2011 since they end their financial year in June. As such I have revised DCF target price from RM6.60 to RM6.80. Sources: Forbes & World Bank.

PARKSON Chart 1

PARKSON Chart 2

On a side note: I do not believe US will default and I also do not think the rich stage this, it is too soon for that. US will either increase the ceiling (40% chance) OR get a debt deal out (cut spending & increase taxes @ 60%). Reading: http://aboiwealthpot.blogspot.com/2011/06/taking-look-into-us-dollar.html. Next on I will examine FREIGHT, JOBST and F&N in Part 2. MAMEE and SUPERMX in Part 3. A special part on PANAMY and CARLSBG because some have said I have missed the boat =). Also I will start looking into AirAsia which I have been dragging for a very very long time.

Deborah Henry

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.

Still Bullish Towards Genting Berhad

Genting made an announcement that it's Q3 net profit doubled following better earnings from Resorts World Sentosa in Singapore which commenced this year. For the nine months ended Sept 30, Genting's net profit swelled to RM1.74bil, or 125% compared with RM798.94mil in the previous corresponding period. Revenue rose 69% to RM11.1bil from RM6.6bil before. With 3 more months to go and with the best quarter for the year I am now positive that it will break the RM14 billion mark I have set previously.

Singapore expects a record 12 million visitors to the Republic Island for 2010 helped by the success of the city-state's two multi-billion-dollar casinos, a remark made by the Prime Minister Lee Hsien Loong last week. This translates into a 24% rise from last year's 9.68 million. It was actually Singapore's overall plan double visitor arrivals to 17 million by 2015. Economists have estimated that tourism currently accounts for about 5-7 percent of Singapore's economy but could grow to as much as 12 percent by 2015 based on government projections on visitor spending.

There was a one-off net gain of RM413.6mil from the oil and gas division. The payment was from BP Global Investment (BPGIL). Genting should be using this cash proceeds as working capital.

Genting Malaysia had poorer performance due to lower business volume, weaker luck factor in the premium business and expenses from start-up costs for its video lottery facility in New York. Revenue slipped 7.7% to RM1.2bil from RM1.3bil. Revenue and profit from the UK casino operations also decreased mainly due to poor luck factor (high payout) and the weaker sterling. Both of these are not a major concern for me as the plantation division improved on the back of higher palm product prices and increase in fresh fruit bunches production.

Surprisingly Genting Malaysia has also publicly said it expected its performance in Malaysia to be affected by regional competition and increase its marketing activities to address the growing competition. I have expected such competition to arise but with Malaysia and Singapore arguably best developed countries in ASEAN will continue to hold their appeal. Thus overall performance would not be significantly affected.

Genting continues to be a good BUY at current price for its casino exposure in Malaysia, Singapore, UK and recently US. I have loaded Genting as part of my assets at RM10.33 earlier on with the long term view that it has the most upside potential from earnings via Resorts World Sentosa. 1H'2011 will be an interesting year for Genting, let's look forward to it.

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 :)