GENTING MALAYSIA BUY. What is GenM s return on its investments? Company report. (Maintained) Rationale for report: Company Update CASINO

Transcription

1 CASINO GENTING MALAYSIA (GENM MK) 29 January 2013 Company report Gan Huey Ling, CFA What is GenM s return on its investments? Rationale for report: Company Update BUY (Maintained) Price Fair Value 52-week High/Low Key Changes Fair value EPS RM3.70 RM4.30 RM4.12/RM3.28 Unchanged Unchanged YE to Dec FY11 FY12F FY13F FY14F Revenue (RMmil) 8, , , ,270.5 Net Profit (RMmil) 1, , , ,890.8 EPS (sen) EPS growth (%) Consensus net (RMmil) - 1, , ,828.0 DPS (sen) PE (x) EV/EBITDA (x) Div yield (%) ROE (%) Net gearing (%) na na na na Stock and Financial Data Shares Outstanding (million) 5,924.4 Market Cap (RM mil) 21,920.3 Book value (RM/share) 2.01 P/BV (x) 1.8 ROE (%) 12.1 Net Gearing (%) na Major Shareholders Genting Bhd (49%) Great Eastern (1.7%) Free Float (%) 51 Avg Daily Value (RMmil) 15.5 Price performance 3mth 6mth 12mth Absolute (%) Relative (%) Investment Highlights Maintain BUY on Genting Malaysia Bhd (GenM) with an unchanged RNAV-based fair value of RM4.30/share. Risk to share price is the outcome of general elections. There is risk that if the opposition were to win the elections, then they might increase the gaming tax rate from 25%. In this report, we take a look at the return of GenM s major investments in the past five years. In spite of the group s mixed record in investing, we are keeping our positive stance on GenM for the resilience of its profits from Resorts World Genting and growing earnings contribution from UK and New York. We find that most of the return on GenM s investments is below the IRR (internal rate of return) of 15%. Although the group has never revealed its internal IRR, we have assumed it at 15%. According to Bursa Announcements, GenM made six major acquisitions in the past five years. We have counted the subscription of debt papers in Wynn Resorts and MGM Mirage as one investment. Out of the six investments, about half were related party transactions. The return on these investments ranged from negligible to 11.1%. One of GenM s safest and highest yielding investments is the debt papers of MGM Mirage. MGM Mirage s senior secured notes due November 2017 yield a return of % annually. In total, GenM subscribed US$131mil (RM441mil) worth of notes in MGM Mirage and Wynn Resorts from FY09 to FY10. These give coupon payments of 4.25% to % annually. GenM s worst investment is its RM250mil subscription of a 10% equity interest in Walker Digital Gaming LLC in FY08. We believe that so far, GenM has not received any dividend payment from Walker Digital for its 10% stake in the company. Instead, we estimate that GenM recorded impairments of up to RM156.6mil in respect of its investment in Walker Digital Gaming. Silver lining is that a few of Walker Digital s gaming patents such as Elite Baccarat have been used at Resorts World Genting. PP12247/06/2013(032380) We estimate the return on GenM s investments in New York and UK at 8.0% to 9.6% each based on the EBITDA of the respective division. If interest expense and depreciation were taken into account, then the return on investments in the assets would be lower than that.

2 TABLE 1 : REGIONAL VALUATION COMPARISONS PE (x) EV/EBITDA (x) Price/CF North America 2012F 2013F 2014F 2012F 2013F 2014F 2012F 2013F 2014F Las Vegas Sands MGM Mirage Wynn Resorts Boyd Gaming Corp Melco Crown Simple average Australia Crown Ltd Hong Kong Melco Int SJM Holdings Galaxy Entertainment Wynn Macau Sands China MGM China Nagacorp Simple average S Korea Kangwon Land Paradise Co Ltd Malaysia/Spore Genting Msia Genting Bhd Genting Spore Genting HK Cruise Companies Carnival Corp Royal Caribbean Norwegian Cruise Source: Bloomberg MAINTAIN BUY WITH UNCHANGED FAIR VALUE OF RM4.30/SHARE We are keeping our BUY recommendation on Genting Malaysia Bhd (GenM) with an unchanged RNAV-based fair value of RM4.30/share. In this report, we took a look at GenM s major investments in the past five years and their returns. In summary, most of the return on investments is below our assumption of an IRR of 15%. The best investment is GenM s US$25mil (RM88mil) subscription of MGM Mirage s senior secured notes in FY09. The notes yield a return of % annually. The worst investment is the 10% equity interest in Walker Digital Gaming LLC in FY08. Since FY08, we estimate that GenM s investment in Walker Digital had been impaired by RM156.6mil. In spite of the group s mixed record in investing, we remain positive on GenM s prospects. Barring bad luck factor, the group s earnings from Resorts World Genting are expected to be underpinned by higher revenue yield and casino patronage. Resorts World New York is envisaged to record a 10% growth in EBITDA in FY13F on the back of improved product mix of ETGs (electronic table games) and slot machines. Earnings risk lies with the casino division in United Kingdom (UK), which is extremely susceptible to the volatility in win percentage. AmResearch Sdn Bhd 2

3 TABLE 2 : ESTIMATED RETURN ON GENM S MAJOR INVESTMENTS Assets acquired Year of Cost of investment Estimated EBITDA/ Est return on Vendor acquisition (RMmil) Rental/Div/Coupon investment (RMmil) (%) Walker Digital Gaming Nov (US$69mil) negligible negligible Company of which (10% equity interest) (impaired by an Tan Sri Lim Kok Thay is a director estimated RM156.6mil) MGM Mirage May (US$25mil) MGM Mirage Senior secured notes Due May 2014 MGM Mirage May (US$25mil) MGM Mirage Senior secured notes Due Nov 2017 Wynn Resorts Oct (US$15mil) Wynn Resorts Mortgage notes Due 2017 Wisma Genting Dec Genting Bhd (based on rental rates reported in FY09) MGM Mirage Mar (US$18mil) MGM Mirage Senior secured notes Due Mar 2020 MGM Mirage Apr (US$48mil) MGM Mirage Convertible senior notes Due 2015 Casinos in UK Jul-10 2,121 (426mil pounds, Genting Singapore including debts) (average EBITDA (including Egypt, impaired by RM91.4mil) from FY11 to FY12F) New York racino Aug-10 1,774 (US$580mil) New York State Div (licence + construction (FY12F EBITDA) of Lottery - grant) Miami Herald and May and Nov 1,352 (US$442mil) negligible negligible The McClatchy Co (impaired by Omni Centre, Miami 2011 RM87.5mil) Individuals Source: AmResearch, Bursa Announcements. Note: We have excluded GenM s acquisition of a few IT companies from Genting Singapore for RM50mil in October 2011 from our analysis AmResearch Sdn Bhd 3

4 GENM S ROI Return on investments ranged from 0% to 11.1% We compared the returns on GenM s past investments against its internal rate of return (IRR). We have assumed GenM s IRR at 15%. Management has never disclosed the benchmark IRR used to assess potential investments. From our study, GenM s investments in the past five years yielded returns of up to 11.1% (see Table 2). We used the cost of investment as the denominator in calculating the return on investment ratio. As for the numerator, we used EBITDA generated by the asset in the first year of operations or the average EBITDA per year recorded by the asset since acquisition. GENM S PAST ACQUISITION OF ASSETS Half of major acquisitions came from related companies According to Bursa Announcements, GenM invested in six major assets in the past five years. We have accounted the subscription in the debt papers of Wynn Resorts and MGM Mirage as one investment. The investments are a 10% equity interest in Walker Digital Gaming LLC, debt instruments in Wynn Resorts and MGM Mirage, Wisma Genting, casinos in UK, properties in Miami and New York. We did not include GenM s 18.4% ownership of Genting Hong Kong in our analysis due to the lack of historical information. GenM s shareholding in Genting Hong Kong dated way before year We have also excluded GenM s acquisition of a few IT companies from Genting Singapore for RM50mil in October 2011, from our analysis. Out of the six assets mentioned above, three were acquired via related party transactions. Worst investment - Walker Digital Gaming GenM s return on its investment in Walker Digital Gaming LLC is believed to be negligible (see Table 2). We believe that since FY08, GenM has not received any dividends from its 10% shareholding in Walker Digital. GenM paid RM250mil for the 10% equity interest in Walker Digital in FY08 from KH Digital Ltd. Tan Sri Lim Kok Thay is a director of KH Digital. GenM recorded an estimated impairment of RM156.6mil from FY09 to FY10 in respect of its investment in Walker Digital. On the flip side, a few of the patents commercialised by Walker Digital are now being used at Resorts World Genting. These include the Elite Baccarat game. Walker Digital s principal activities are to develop and commercialise gaming patents. Debt instruments in Wynn Resorts and MGM Mirage safest and one of the highest The notes in Wynn Resorts and MGM Mirage yield coupon rates of 4.3% to 11.1% per annum (see Table 2). Although these are below the assumed IRR benchmark of 15%, the return from the debt instruments is one of the highest and safest. GenM invested about US$131mil (RM441mil) in the notes of its fellow gaming companies from FY09 to FY10 (see Table 2). GenM subscribed to the notes following fund-raising exercises carried out by the gaming companies during the 2008/2009 financial crisis. Also, the investments in the notes were made after GenM s acquisition of the 10% shareholding in Walker Digital in late-fy08. In May 2009, GenM invested US$25mil (RM88mil) in MGM Mirage s % senior secured notes due May 2014 and another US$25mil (RM88mil) in MGM s % senior secured notes due November In October 2009, GenM invested a further US$15mil (RM51mil) in Wynn Resorts Ltd s 7.875% mortgage notes due In 2010, GenM invested another US$66mil (RM214mil) in senior secured and convertible senior notes issued by MGM Mirage. The senior secured notes due March 2020 yield a coupon rate of 9% per annum while the return on the convertible notes is lower at 4.25%. The convertible notes are convertible into MGM shares at a price of US$18.58/share. Based on MGM s current share price of US$12.97/share, the convertible notes are out-of-money. Rental yield of about 9.6% from Wisma Genting We estimate GenM s return on its investment in Wisma Genting at 9.6% (see Table 2). The return of 9.6% is also the estimated rental yield of Wisma Genting. Based on the reported rental rate of RM4.16/sq ft in FY09, rental income from Wisma Genting would come up to about RM20mil annually. We do not know if rental rates for Wisma Genting have increased since FY09. We believe that the occupancy rate of Wisma Genting is close to 100%. AmResearch Sdn Bhd 4

5 CHART 1 : CASINO EBITDA BREAKDOWN IN 9MFY12 Source: Company Genting Group of Companies is the largest tenant of the building. The building has net lettable area of 409,033 sq ft. GenM acquired Wisma Genting from Genting Bhd for RM213mil in FY09. GenM also bought two parcels of development land together with workshop, office and storage space in Segambut for RM16mil from Genting Bhd. Casinos in UK yielding about 8% return We estimate GenM s return on its investments in UK at roughly 8.0% (see Table 2). After factoring in interest and depreciation expense, the actual return on investment would be lower than 8%. Our calculation is based on the average EBITDA per annum recorded from FY11 to FY12F. The UK casino division recorded an EBITDA of RM154mil in FY11 and for FY12F, EBITDA is forecast at RM186mil. GenM acquired the casinos in UK for 426mil pounds or RM2.1bil (including assumption of borrowings) from Genting Singapore PLC in FY10. The acquisition valued the casinos at an FY11 EV/EBITDA of 11.2x based on GenS management s forecast of an EBITDA of 38mil pounds at that time. GenM s casino division in UK is susceptible towards volatility in luck factor. This is due to the lack of volume and the club-style type of casino in UK. The casino unit in UK also faces the risk of debts being uncollectible. Most of the high-rollers in the casinos in London come from Middle East and Asia. Silver lining is that the casino unit in UK has been recording improvements in visitor patronage. In 9MFY12, number of visitors at the casinos in London rose 6% YoY while those at the provincial casinos inched up 3% YoY. Another positive note is that the volatility in the win percentage of the UK unit would smoothen out when the large casino in Birmingham is completed in FY15F. The casino, which is currently under construction, is estimated to cost about 120mil pounds (RM600mil). Return on investment in New York is higher than UK We estimate GenM s return on Resorts World New York (RWNY) at 9.6% versus 8.0% for the casino assets in UK (see Table 2). This is based on our forecast of an EBITDA of RM169.7mil for RWNY in FY12F. We estimate GenM s investment in RWNY at RM1.8bil or US$580mil based on the licensing and construction cost of US$830mil or RM2.5bil, net of state grant of US$250mil or RM765mil. In spite of the hefty investment, RWNY has proven to be a stable income generator for GenM. AmResearch Sdn Bhd 5

6 RWNY s average win per machine was US$370/day in FY12F compared to the simple industry average of US$241/day. In the coming months, lawmakers in New York State are expected to discuss the details of the casino legislation. Although the Governor had proposed three new casinos in upstate New York in his State Address, there were no details on the tax rates, casino license fees and Phase 2 of the casino legislation. Negligible return from investment in Miami We believe the return on GenM s investment in Miami to be negligible currently due to the insignificance of the rental income (see Table 2). Also, GenM has yet to commence any development on its properties in Miami pending the approval of the casino legislation. We believe that GenM would not be starting any development works in Miami until there is a clear outcome on the casino legislation. This is expected to take place in FY14F. It was reported that lawmakers in Florida would be studying the casino industry in FY13F before making a decision in FY14F. It was also reported that GenM would be a constructive player in the casino study process. Recall that the original development cost of Resorts World Miami was US$3bil. We estimate that GenM spent US$442mil or RM1.35bil to acquire the Miami Herald newspaper site and Omni Centre in Miami in FY11. Net book value of these assets was written down by RM87.5mil in GenM s 3QFY12 results. Incidentally, GenM s casino in Bimini Island, Bahamas is scheduled to open in 1QFY13. The casino is expected to have gaming space of about 10,000 sq ft. Cost of the casino is roughly US$20mil (RM60.4mil). The casino is anticipated to attract tourists mainly from the U.S. AmResearch Sdn Bhd 6

7 TABLE 3 : FINANCIAL DATA Income Statement (RMmil, YE 31 Dec) F 2013F 2014F Revenue 5, , , , ,270.5 EBITDA 1, , , , ,898.3 Depreciation (273.1) (366.2) (371.7) (439.7) (508.7) Operating income (EBIT) 1, , , , ,389.5 Other income & associates Net interest Exceptional items (108.0) (24.6) Pretax profit 1, , , , ,528.0 Taxation (455.1) (472.8) (528.9) (593.0) (637.1) Minorities/pref dividends Net profit 1, , , , ,890.8 Core net profit 1, , , , ,890.8 Balance Sheet (RMmil, YE 31 Dec) F 2013F 2014F Fixed assets 4, , , , ,227.8 Intangible assets 3, , , , ,332.3 Other long-term assets 2, , , , ,428.4 Total non-current assets 10, , , , ,988.4 Cash & equivalent 3, , , , ,281.3 Stock Trade debtors Other current assets Total current assets 4, , , , ,037.3 Trade creditors Short-term borrowings Other current liabilities , ,440.1 Total current liabilities 1, , , , ,537.1 Long-term borrowings , ,030.0 Other long-term liabilities 1, , , ,119.2 Total long-term liabilities 1, , , , ,149.2 Shareholders' funds 11, , , , ,275.5 Minority interests BV/share (RM) Cash Flow (RMmil, YE 31 Dec) F 2013F 2014F Pretax profit 1, , , , ,528.0 Depreciation Net change in working capital (568.2) (86.1) (1,139.5) (545.9) (611.1) Others 31.0 (64.7) Cash flow from operations 1, , , , ,789.7 Capital expenditure (277.4) (516.8) (700.0) (1,100.0) (700.0) Net investments & sale of fixed assets (3,020.1) (2,680.5) Others Cash flow from investing (3,189.4) (3,135.8) (622.3) (1,010.0) (626.1) Debt raised/(repaid) (30.6) (30.2) (29.8) Equity raised/(repaid) (106.3) (38.3) Dividends paid (336.8) (348.1) (521.3) (592.4) (710.9) Others (693.1) (19.7) Cash flow from financing (572.3) (551.9) (622.6) (740.7) Net cash flow (2,294.3) (732.9) ,422.9 Net cash/(debt) b/f 5, , , , ,212.4 Forex (90.5) Net cash/(debt) c/f 2, , , , ,635.3 Key Ratios (YE 31 Dec) F 2013F 2014F Revenue growth (%) EBITDA growth (%) Pretax margins (%) Net profit margins (%) Interest cover (x) na na na na na Effective tax rate (%) Net dividend payout (%) Debtors turnover (days) Stock turnover (days) Creditors turnover (days) Source: Company, AmResearch estimates AmResearch Sdn Bhd 7

8 CHART 2 : PE BAND Source: Bloomberg Published by AmResearch Sdn Bhd ( P) (A member of the AmInvestment Bank Group) 15t h F l oor B a ng un an A m B a nk Gr ou p 55 Jalan Raja Chulan Kuala Lumpur Tel: ( 03) ( re sear c h) F a x: ( 03) Printed by AmResearch Sdn Bhd ( P) (A member of the AmInvestment Bank Group) 15t h F l oor B a ng un an A m B a nk Gr ou p 55 Jalan Raja Chulan Kuala Lumpur Tel: ( 03) ( re sear c h) F a x: ( 03) The information and opinions in this report were prepared by AmResearch Sdn Bhd. The investments discussed or recommended in this report may not be suitable for all investors. This report has been prepared for information purposes only and is not an offer to sell or a solicitation to buy any securities. The directors and employees of AmResearch Sdn Bhd may from time to time have a position in or with the securities mentioned herein. Members of the AmInvestment Group and their affiliates may provide services to any company and affiliates of such companies whose securities are mentioned herein. The information herein was obtained or derived from sources that we believe are reliable, but while all reasonable care has been taken to ensure that stated facts are accurate and opinions fair and reasonable, we do not represent that it is accurate or complete and it should not be relied upon as such. No liability can be accepted for any loss that may arise from the use of this report. All opinions and estimates included in this report constitute our judgement as of this date and are subject to change without notice. For AmResearch Sdn Bhd Benny Chew Managing Director AmResearch Sdn Bhd 8