Resorts' New Growth Opportunities

Resorts' New Growth Opportunities
Updated : 21-08-2007
Media : The Edge
Story By : N/A via www.biznewsdb.com

RESORTS World Bhd may be utilised as a vehicle by the Genting Group for investing in new casino projects overseas, which is positive for its long-term growth prospects, said Credit Suisse.

The research house said the company management had indicated the possibility of such a plan because Genting International plc already had its hands full with UK casinos and the upcoming Singapore integrated resort.

It said its conversations with foreign investors suggested that this major potential change in Resorts prospects was not yet widely known.

¨This would be a logical move given Resorts has an under-geared balance sheet and its experience as a long-established casino resort operator.¨

We view this as a significant catalyst for Resorts, as it will enhance its long-term growth potential, and allow it to diversify,〃 it said in a research note yesterday.

Credit Suisse said another potential catalyst for Resorts was its clear and sustainable dividend policy, given that the company had recently embarked on share buybacks, which the research house believed was the start of long-term capital management.

It said a raise in Resortsˇ dividend payout to between 30% and 40% from 20% now would be ¨a step in the right direction〃.

¨We also hope that the management will cancel the shares bought back, currently amounting to 1% of issued shares,〃 it added.

Credit Suisse said concerns to be taken into account for Resorts included dilution by possible conversions of bond, and a tax hike in casino gaming.

Resorts has an outstanding RM1.1 billion convertible bonds issued on Sept 21, 2006 and due 2008, while its parent Genting Bhd has a US$300 million (RM1.05 billion) exchangeable bond into Resorts. It said both of these two instruments were over 60% converted.

On concerns of a tax hike, it said every 1% point increase in gaming tax could trim Resortsˇ net profits by 2%.

However, having reviewed the possible risk factors, Credit Suisse believed the positives outweighed the negatives.

Thus, the research house reiterated its ¨outperform〃 rating on Resorts, with an unchanged target price of RM5.85, which indicated a 60% potential upside from current levels.

¨Moreover, Resorts targets largely mass market leisure tourists, and this segment of customers is unlikely to be unaffected by the turmoil in financial markets. Thus, we see this as a buying opportunity,〃 it said.

Meanwhile, OSK Investment Research said Resorts had a greater financial flexibility to consider a more aggressive capital management and regional casino growth opportunities.

It said the second stage of Resorts capital management strategy could involve the formulation of a dividend policy.

¨Assuming if Resorts were to peg its dividend payout as a percentage of free cash flow, a 40% payout could indicate a threefold rise in current gross dividend yield to 3%.

¨Given Resorts robust-free cash flow generation and overcapitalise balance sheet, we would not discount the possibility of a one-off capital repayment,〃 it added.

OSK Research has maintained its ¨buy〃 call on Resorts with a target price of RM5.35, based on forward FY08 price-earnings ratio (PER) of 22.4 times, still below its historical high of 24 times.

¨If we were to strip out the market value of its 19.98% stake in Star Cruises and the estimated net cash per share of 61 sen by end-FY07, our target price would imply that its casino business continues to be valued at a relatively favourable 11.8 times implied FY08 PER (53% discount to global casino peer 24 times average forward PER),〃 it said.

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