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SI Research: Genting Singapore – Irrational Sell-off Opens Opportunity

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It seems that odds have not been favouring local-listed integrated resort operator (IR) Genting Singapore lately. Since the start of 2019, Genting Singapore has seen its stock lost almost 10 percent of its value to trade at $0.880 per share – a level not seen since 2018.

While it is not the best of year for global equities, the Straits Times Index (STI) still managed to eke out a positive 4.8 percent year-to-date return. Clearly, this reveals that Genting Singapore is one of the underperforming component stocks in the STI. Taking a look at its five-year historical price data, Genting Singapore’s negative return of 34 percent will appear even starker when compared to the STI’s negative return of 2.5 percent over the same period.

However, at the current price level, we find that selling may have overextended, making the stock attractively priced now. Specifically for the patient long-term investors, we find that there is compelling value to the potential upside the stock offers.

Recent Sell-off Due To Cautious View On RWS Redevelopment

Apart from the usual trade war noise that has weighed on global equities, the recent decline in the share price of Genting Singapore can be attributed to two recent announcements: Change in casino taxes and the redevelopment of Resorts World Sentosa. Both sets of news were announced in April this year.

In the first of the news, the Singapore Government introduced a new tiered-tax structure for casinos in 2022, with a new 10-year moratorium. Without going into details, the revised and higher tax rates on casino operators’ gross gaming revenue is bound to hurt their profitability. Making it even more burdensome, the two IRs in Singapore must also meet their investment commitments or face even higher tax rates.

While higher taxes are in no way good news, Genting Singapore has committed to investing $4.5 billion in the redevelopment of Resorts World Sentosa (RWS). So, we will be sure the group would not be impacted by higher taxes for not meeting its investment commitments. However, the market has taken a cautious view of the large capital expenditure (capex) involved and the accompanying uncertainties over short-term returns before new enhancements come on stream in 2024.

Looking at the timeline, with higher taxes coming in 2022 and capex peaking around 2023, investors’ concerns may indeed be warranted. Yet, we are of the view that the market may be underappreciating the impact of the resort’s expansion.

Some of the redevelopment details have been outlined. In general, RWS expansion will result in an addition of 164,000 square metre (sqm) – a 50 percent increase – of new gross floor area (GFA) for leisure and entertainment space. The developments would include expansion of the acclaimed Universal Studios Singapore, the expansion and re-branding of SEA Aquarium to Singapore Oceanarium, the expansion of MICE (Meetings, Incentives, Conferences and Exhibitions) facilities and the addition of up to 1,100 new hotel rooms.

For all that is worth, the Singapore government has “reciprocated” by extending the exclusivity periods for the two casino operators to the end of 2030.  In addition, RWS will be given the option to deploy additional 500 sqm of approved gaming area after the redevelopment is completed, in return for its investment commitment.

Japan IR Bid A Wild Card

Genting Singapore has officially announced its participation in the Request-For-Concept bid for the Osaka IR in Japan. Previously, investors were banking on Japan’s IR bid as a potential key catalyst for the stock. But the RWS episode, along with higher tax rates in Singapore, put a dent in investors’ confidence of Genting Singapore’s financial strength to undertake two ambitious expansions.

Likely, the management estimates that construction for the Japan IR would only commence in mid-2021 or in 2022 at the very earliest and that funding will not likely be needed until 2022 onwards. Still, that would mean that both the Japanese and RWS project would coincide with one another. Assuming the Japan IR takes five years to complete, investors are going to see an extended heavy capex period till 2027 before revenue comes on stream meaningfully.

But so far, management has quelled rumours that they are intending to do any rights issue, least at this stage in time. As of the latest 1Q19 results, Genting Singapore was sitting on a cash pile of $4.2 billion while total borrowings only amounted to $936.5 million, putting Genting Singapore in a favourable net cash position of $3.3 billion which the group will likely tap on first.

In terms of financing schedule, the earliest major capex will be the estimated $1 billion land cost for RWS expansion due in 1Q20.  With Genting Singapore generating an operating cash flow in excess of $1 billion a year, the capex relating to RWS expansion alone should be digestible with internal funds; even after taking into account of the higher tax rates and assuming that the group maintains its distribution of the $420 million in dividends.

We also learned that the group has later voluntarily made a pre-payment of $680 million outstanding under its syndicated senior credit facilities on 10 April 2019. The move would further enlarge Genting Singapore’s debt headroom which the group can capitalise on if Japan’s IR bid proves to be successful.

Irrational Sell-off Opens Opportunity

Having established that Genting Singapore is capable of digesting two ambitious expansions, we think that the recent sell-off has been largely irrational. This brings us to our final point.

As of now, there is still no certainty of when the Japanese government would grant the IR licenses. Meanwhile, the Genting Singapore’s Osaka IR bid will come head-to-head with six other prominent IR operators including Las Vegas Sands, meaning that the group may not incur the relating capex to a Japan IR after all. On the other hand, if Genting Singapore is awarded a license and goes into net debt to grow its business, why should it be viewed unfavourably?

Meanwhile, despite high taxes on gross gaming revenue, Singapore’s IR still enjoys one of the lowest tax rates in the world. So we will be sure that Genting Singapore will remain competitive.

Finally, on the redevelopment of RWS, we think investors should see the expansion as a concrete development for Genting Singapore to grow its business and hence should view it favourably instead.  Long-term investors may well find that the current valuation of Genting Singapore – at 14 times price-to-earnings per share and four percent dividend yield – something to cheer about in years to come.

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