Good time to bet on Genting?

IT FEELS like a long time ago that Malaysia enjoyed a certain premium to its share valuations because of its political stability. In fact, the turning point was a fairly recent event — the general election on March 8.

Since then, our political landscape has changed significantly, and there is much to be played out before it can reach some form of equilibrium.

Hence, we have stocks gyrating wildly each time there is a major development involving politicians and parties. For the most part, however, the Composite Index has been heading south, indicating a preference to exit rather than an opportunity to buy.

Most of the blue chips haven’t been spared, including some that deserve better. Genting Bhd is an example.

It is a premier leisure and hospitality company that delivers stable earnings, is in a net cash position and has exposure to Singapore’s multibillion-dollar integrated resort development on Sentosa Island.

Yet, Genting’s share price is on a relentless down trend since March, hitting its 52-week low of RM5.15 on June 19. It has since recovered a little but is still about 30% down on a year-to-date basis.

Judging by a Bloomberg poll of recommendations, most analyst are still bullish on Genting, with 19 out of 26 analysts maintaining a “Buy” call. Six have a “Neutral” call and one has a “Trading Buy” call.

The target prices worked out by the research outfits mostly range from RM6.70 to RM11.70, which is well above the current market price.

“During the SARS (severe acute respiratory syndrome) outbreak, Genting was trading at a price earnings (PE) ratio of 13 times. At that time, leisure and hospitality accounted for two thirds of its operating profits,” says TA Securities gaming analyst James Ratnam.

“Today, its others businesses like power, oil and gas, and plantations are contributing close to 50% of its operating profits. Yet it is trading at 11x PE because of the global de-rating.” He has a RM6.95 target price for the stock.

The betting abates

Analysts say investors may have a few concerns regarding Genting’s prospects. For one, along with the global economic uncertainty, there has been a general de-rating on casino stocks as high rollers are expected to take a break with their bets.

A combination of competition, inflation and high borrowings have pushed global casino stocks to retrace by 40% to 60%.

As betting is considered a luxury, the hard times may see a drop in casino patrons as they opt to stash their cash.

Genting may also be affected by the knock-on effect of the sudden steep hike in petrol pump prices and weakening consumer sentiment. This is likely to result in a reduction in visitors to the Genting Highlands resort.

“Foreigners look at Genting as a gaming play. Casinos in Macau, Britain and Las Vegas aren’t doing too well, so the foreign investors assume Genting is also in the same boat,” says an analyst from RHB Research.

She explains that Genting’s target market is different from those of the other casinos. Genting depends more on the domestic market than on foreign tourists.

“Macau casinos, for instance, generate money mainly from the high rollers, while in Genting, high rollers only make up about 30% of total casino revenues. Genting’s casino players are mostly day trippers, people who just come up to enjoy the cool air for a day and do not bet a lot of money,” she says.

The cost overrun factor

Reason No. 2 that’s bogging down Genting’s share price is the worry about Genting International Plc’s (GIL) projected construction cost for its integrated resort in Singapore.

GIL, Genting’s 53.4% subsidiary, is building the integrated resort on Sentosa Island for up to S$6bil (RM14.3bil), which is about S$800mil, or 15%, above its initial budget of S$5.2bil due mainly to higher construction expenses.

The management has reiterated that they have managed to buy forward their raw materials, but investors remain wary. They wonder exactly how much Genting has managed to stock up.
“People are still cautious as to how much raw materials one can buy forward? This is especially when every other construction company has been affected by rising costs. So what makes GIL different?” asks an analyst from a local house.

The analyst from RHB Research says she would not be surprise if the budgeted cost increased further, given the cost overruns incurred for other large construction projects in the region, due to high raw material prices.

“It is quite difficult to buy a significant amount of raw material at forward rates. Furthermore, Genting has only subcontracted out about RM2bil of the RM6bil project cost of construction jobs. So it may not have bought forward enough, since it has only allocated a third of the work,” she says.

Ratnam says most of the company’s requirement for steel and cement has been locked in last year.

“Yes, it is quite likely that there will be a cost overrun above the RM6bil mentioned. If Genting needs to raise funds, it shouldn’t be a problem, considering its name and track record,” he says.
“Genting has already made provisions of RM250mil in its accounts. Besides, it also has S$300mil of credit standby facilities. So if there is a cost overrun, I think Genting has factored in that possibility and has also provided for it,” says the local analyst.

Higher gaming taxes?

Another share price dampener is the likelihood of an increase in gaming taxes when Budget 2009 is tabled in parliament next month.

At present, Malaysia’s gaming tax of 25% on gross gaming net win is already the second highest in Asia.

A higher tax structure will erode the competitiveness of the Genting Highlands casino, considering that Singapore is scheduled to open two casinos in 2010.

Genting is also unable to pass on this cost increase to consumers. Based on 2008 figures, a gaming analyst says a 1% tax increase will set the company back by RM41mil.

The analyst from RHB Research says there logically shouldn’t be a hike in gaming taxes as this will only increase illegal gambling and reduce government revenue in the longer term.

“However, given the government’s immediate need to raise money for its coffers, we would not be surprised if this were to happen, based on the precedent set by the recent implementation of windfall taxes,” she says.

A powerful catalyst

With Genting taking such a beating recently, this could be a good time to revisit the stock.
A possible catalyst that has been talked about for a while is Genting selling off its power assets, which analysts reckon are worth some RM4bil.

The power division, under Genting Power Holdings Ltd, has a net attributable generating capacity of about 1,450MW from its interests in seven power plants in Malaysia, China and India.

The power division is now the second largest contributor to Genting’s earnings. Management has always mentioned that over time, there are plans to concentrate more on their core business of gaming.

CIMB Research says the possible sale of the power assets, at the right price, will unlock more cash, which can either be returned to shareholders or be used for gaming expansion.

Genting has expanded its casino footprint into Britain, Singapore and the Philippines in the last one year.

Recently, Tenaga Nasional Bhd has written to Genting to officially indicate its interest in the latter’s power assets, but no formal proposal has been given to the gaming-based conglomerate yet.

Source