Thursday, January 29, 2015

Genting's Management and Financials

Geez 2015 came and the first month is ending! Time and tide really waits for no man. In investing, time helps in compounding, and we just have to keep reminding ourselves that we need to act early and incrementally while we are young. Because, if we don't, before we know it, we are 40, or 50 and the first half is gone and we are into half-time. Need to think quickly how we want to play the second half.

Today, Let's continue our analysis on Genting. We answered the first few questions: what's the investment thesis, is it a good business, is it cheap etc. Next, we focus on the management. Genting Singapore is essentially being run by two savvy executives and supported by strong managers who know the business well. The chairman is from the founding family and his lieutenant helps him run the day to day operations. Meanwhile the board is also made of more independent directors than insiders which is good for governance. Overall Genting's management has shown to be above board and has generated value for shareholders. The only caveat would be its minimal disclosure and its shareholder return policy while that has also improved with the recent share buyback announcement.

Genting's Board

Next questions: does it have Strong Financials and its Geographical and Industry Exposure? Well, Genting is all Singapore and gambling (just a bit of non-gaming entertainment). For financials, we use the cheatsheet that has appeared various times here (below). Numbers in blue are derived from others on the sheet. The first thing to highlight is that the sheet was updated in Sep 14. Well that's with investing, we are so busy with life, so things like updating spreadsheets shouldn't be top priority. Today let's use this one. Most of the time, things don't change that much in 3 months. Investing is a long marathon. People who wants to play it day by day and week by week are missing the point.

Ok, besides the date, one of the other first things worth highlighting would be its strong free cashflow. Genting is estimated to generate S$800m in free cashflow or FCF in the sheet but it is likely to have the ability to do a billion in the future. Casino is bloody good business once the initial capital outlay is done. Gamblers simply keep coming to drop money, and when times are good, they actually don't mind doing it. Genting is suffering now as per the Macau casinos because of the impact of Xi Jin Ping's anti-corruption campaign. But as the Asia middle income continues to grow, wealthy people will also keep spending and they would want to visit Singapore. Hence it should be a matter of time that free cashflow reaches a billion over time.

Genting's cheatsheet

As the stock nosedive with bad news about delays in Japan, Korea and clampdown in China, we can now get Genting at 5.8% free cash flow yield. If it its a billion in free cashflow, we are talking about 7% and if we consider that the S$2 billion of cash needs to come back to shareholders, then we get close to 10% free cashflow! 10% free cashflow is like a super bargain for a multi-billon dollar firm. It doesn't come often. 

Now, one might question, if Genting is generating so much cash, why doesn't it pay more dividend? Well, that should come in time, but again, things move in years in the world of investing, so shareholders would just have to be patient. Genting didn't start out throwing close to a billion dollar cash. It was listed in the early 1990s but only started to have stable positive free cashflow in the last few years. Before Resort World Singapore was opened, it was committed to build it at the doldrums of the financial crisis, burning S$2 billion in 2009. 

So dividend was never discussed then. Now that things have change, investors hoped for a better shareholder return and Genting responded with a share buyback. Part of the reason was also that the capex needed for Korea and Japan would be delayed, so might as well return cash to shareholders and generate some goodwill. That could be the start of better dividend and shareholder return.

Ok. We discussed all the good news, what about the bad news? 

The key risk is Genting's working capital. In the cheatsheet, it is shown as WC of S$4.7 billion. Somewhere in the right column there is also Accounts Receivables at S$1.5 billion .These are huge no.s considering that Net Profit and free cashflow are still just S$800-900 million. This also relates to Genting's strategy of growing its VIP clientele. 

VIP gamblers don't bring cash to play. They play on credit and Genting has to provide that credit. Some of these clients come from god-knows-where and they disappear after playing. So these are the account receivables on Genting's balance sheet. Some of these monies would likely not come back. So there is this huge risk of impairment in the quantum of S$500-1,000 million! This would be a big hit to its balance sheet with just S$9 billion in equity.

Well the mitigating factor is that Genting has clarified that things are under control and they have provisioned for 1/3 of the amount. Also the market has known this for quite a while so this negative is probably largely factored in.

Genting's franchise

So that's really the short and sweet analysis on Genting, the stock is at a multi-year low, there is the slowdown in gambling and the looming account receivables, but we should continue to see stable growth as the mass affluent from ASEAN and China continue to flock to Sentosa. Not forgetting that Universal Studios still have a lot of room to grow and it is opening its own brand hotel in Jurong later this year which will contribute to near term growth.

As the picture above shows, Genting's transformation to a world class resort would continue. By leverage on the brand name of Universal, Sentosa and Singapore, it would grow and generate even more cash going forward. To be able to get it at 7% free cashflow should look like a bargain years from now. 

This is one stock that probably won't affect our sleep at night.

The first post on Genting.

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