Saturday, November 01, 2014

Genting Singapore

The author owns Genting and dollars in this post refers to SGD.

Genting Singapore has recently dropped to multi-year lows and the stock at this level looks increasingly interesting. The stock has fallen from its high of $2.30 in 2011 to a dismal $1.04 as investors lamented about the lack of growth and the looming accounts receivables on its balance sheet. 

Genting, needs no introduction. It started the first casino in Malaysia some 40 years ago and was awarded the licence to run the Resorts World casino in Sentosa, Singapore in 2006. Its transformation from a local casino operator in Malaysia to an entertainment conglomerate today is nothing less than spectacular. Today, the Singapore business alone makes close to 3 billion in revenue and it has a market cap of more than 12 billion dollars. 

In this and the next few posts, we would do some analysis on this name to determine its intrinsic value and try to understand its business moats. As with the past analyses, we would be asking the few questions on the Stocks page.

1. What is the Investment Thesis?

Genting is one of the only two casino operators in Singapore earning over 3 billion dollars in gross gaming revenue or 45% market share on the island. While Singapore's gaming market has not grown much in recent years, growth should track the regional GDP over the medium term at 5% YoY. It has also sought to differentiate itself by providing family entertainment and a different experience for tourists. It owns Universal Studio Singapore as well as other strong entertainment franchises that would continue to grow alongside its casino business.

Genting has also eyed opportunities overseas and it announced an investment in Korea and would likely be a key player in Japan when its gaming market opens up. These overseas business remain free options of $0.20 to $0.40 per share today as most investors and analysts do not factor any value into its share price given the time horizon is still a good 5 to 7 years away.

2. Is it Cheap?

With the 60% decline in stock price, Genting is becoming quite palatable. Genting trades at 17x forward PE and 9x EV/EBITDA which are at the lower ends of its historical ranges. Its PE is still pretty high if we just think about PE as we discussed before ie 17x means it would take 17 years to recoup our capital. But we have to understand that this is fundamentally a great business and the 17x PE is based on next year's earnings which would not necessarily do justice. Looking over the past few years, it managed to achieve a record of over 1 billion dollars in net profits and if we use that number, then PE goes down to 15x.

Based on free cashflow (FCF), the preferred way to look at valuation, Genting could generate around 600 million dollars to 1 billion dollars of FCF annually. If we use a conservative 600 million, we are talking about a 5% FCF yield which is quite high by any standards. This would also reflect that the stock has really corrected to such a level which makes it attractive enough for value investors.

Unfortunately, Genting does not pay a lot of dividend, so despite having a 5% FCF yield, its dividend is only 1%. But as the stock price correct further, its management might think about strategies to boost it, including raising dividends or perhaps a symbolic share buyback to signal that the stock is too cheap.

Genting's stock chart since IPO, at $1.04, it's back to 2009 levels

3. Is it a Good Business?

Well, gambling is great business. Not just good, but great, especially for the casino operator though not necessarily for the gamblers and their families. It is said that all vices make great businesses: smoking, drinking, gambling which is why they are also heavily regulated. Such businesses are driven by the idiosyncrasies of the human behaviour namely habit and addiction which makes consumption very sticky and allows the operators to have pricing power. Hence gambling is a good business, sorry great business.

Gambling habits have been well studied globally and statistic showed that around 1% of the population would suffer from gambling issues. The 1% of compulsive gamblers would also contribute to a significant 30-40% of the casino's revenue. In Singapore's case however, with the various restrictions and the focus on attracting VIP gamblers, the revenue contribution from Singaporeans and residents had declined from a high of 60% to 30% today. For Genting, it also has a significantly high VIP revenue of over 50% driven by Chinese and South East Asian tourists.

When looking at the global VIP gambling dynamics, one would then have to consider where Genting stands in the regional high class luxury entertainment and how this would evolve in the next 5 to 10 years. With half a dozen countries talking about integrated resorts, competition would undoubtedly intensify in the next few years. Genting's focus on entertainment and gambling could be its value proposition against the other competitors in Macau and some of the other ASEAN countries coming up with their own integrated resorts. It is also developing its brand name alongside megabrands like Universal Studios and Hard Rock Cafe.

In the last few years, the VIP gambling market suffered quite a bit as the Chinese economy slowed and the government clamped down on corruption/extravagance of its officials and this had a huge snowball effect on the whole global luxury market. However while this trend would continue, the rise of the global middle class and high income earners would in time offset this weakness.

Genting is well positioned to attract these high rollers both from the ASEAN region and from China and we would further examine its financials and risk in another post.

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