GENTING BHD Analysis Date: (GENTING) Prepared by: L. C. Chong All figures in thousands of Ringgit Malaysia except per share values and ratios 30/08/2013 Financial Year: 2012 31/12/2012 Latest Quarter: 31/12/2012 Price: 9.33 Stock Category: Large Capital Growing Overview Genting Berhad, an investment holding company, engages in leisure and hospitality, power, plantation, oil and gas, and property businesses worldwide. Its Leisure and Hospitality segment operates hotel, gaming, and entertainment businesses; and provides tours and travel related services, and other support services. The company s Power segment engages in the generation and supply of electric power. Its Plantation segment is involved in oil palm plantations, palm oil milling, and related activities. The company s Oil and Gas segment engages in oil and gas exploration and development activities. Its Property segment is involved in the property development activities. Genting Berhad also provides advisory, technical, and administrative services to oil and gas companies; risk and insurance management consultancy services; project management services; information technology services relating to the gaming resort industries; operation and maintenance services for power plant; offshore financing; and technical and management services. In addition, the company is involved in golf course and online gaming operations; real estate and business consulting activities; manufacturing and trading of bio oil; manufacturing and sale of multi feedstock biodiesel and pharmaceutical glycerine; provision and sale of utilities consisting of treatment and supply of water; provision of services for loyalty programs; and property management and investment activities. Further, it engages in the genomics research and development, fresh fruit bunches processing, coal trading, land rig leasing, and ornamental fish businesses, as well as in the ownership and operation of aircrafts. The company was founded in 1965 and is headquartered in Kuala Lumpur, Malaysia. Board: Main Board FBMKLCI: YES Industry: TRADING SERVICES Sub Sector: GAMING Ownership: Corporate Owned (Local) Investment Strategy Portfolio Strategy: Lump Sum + Top Up Averaging Down Method: Dollar Cost/Value Averaging Portfolio Execution: Basis for Buying: Basis for Selling: Buy and Monitor Momentum Company owner/directors, and major fund institutions heavily buying EPS QoQ Growth > 15% Price is below Intrinsic Value Price is below or around the fair price derived from EY% High Company owner/directors, and major fund institutions heavily selling Fundamental of business turns unattractive or bad Has the stock risen too far from its intrinsic value? Long term trend changed from bullish to bearish Price is above or around the price derived from EY% Low Quarterly EPS drop for 3 consecutive months. L. C. Chong Page 1 of 13 http://lcchong.wordpress.com
Financial Performance Sustainable Profitability 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 ROE 10% 12% 14% 13% 16% 5% 8% 14% 16% 14% ROIC 11% 11% 11% 11% 16% 6% 9% 15% 18% 13% Rating: Average Measure 3 Y Avg. 5 Y Avg. 3 Y % 5 Y % Consistency ROE 15% 15.00% 13.66% 0.96% 30.78% 4% ROIC 15% 14.91% 13.83% 7.05% 22.23% 16% I found that GENTING s net profit often affected by net gain on dilution of shareholding arising from bond conversions or net gain on disposal/deemed disposal/dilution of shareholdings. For instance, this caused dip of ROE and ROIC in 2008. From 2008 to 2011, ROE and ROIC had been increasing consistently. In 2012, reason of slight decrease of ROE and ROIC is mainly caused by drastic increase of Selling and distribution costs, Administration expenses, Impairment losses and Other expenses. I believe GENTING increased their spending in expanding business to US and UK. Earnings Growth Quality Rating: Very Good 25,000,000 20,000,000 15,000,000 17.695 21.287 25 20 15 Result YoY % 3 Y % 5 Y % 10 Y % Consistency Revenue 11.76% 6.37% 20.72% 17.35% 87% EPS 39.13% 29.68% 49.04% 5.97% 1% Growth of revenue is consistent. EPS has been increasing consistently since 2008. The dip of EPS in 2007 was caused by split shares. 10.785 10,000,000 5.381 5.957 7.752 10 5,000,000 2.0268 2.6352 1.538 2.826 5 0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 PAR Adjusted EPS Revenue Linear (PAR Adjusted EPS) Linear (Revenue) 0 L. C. Chong Page 2 of 13 http://lcchong.wordpress.com
20% 15% 10% 5% Healthy Cash Flow 0 10 20 30 40 Rating: Average Measure 3 Y Avg. 5 Y Avg. 3 Y % 5 Y % Consistency CROIC 15% 9.92% 7.16% 0.06% 0.39% 10% CCC 68.07 65.25 48.67% 21.88% 80% CROIC is below my benchmark because of high capex. GENTING doesn t generate sufficient cash flow out of its huge equity as well. Except 2009, GENTING is able to maintain 9% 13% of CROIC. 0% 50 5% 10% 60 70 80 15% 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 CROIC 13% 11% 13% 15% 11% 0% 11% 11% 10% 9% CCC 16 22 15 17 33 34 58 77 74 61 90 8,000,000 6,000,000 4,000,000 2,000,000 0 2,000,000 Cash Flow Growth Quality 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Rating: Average Result YoY 3 Y 5 Y 10 Y Consistency Ops. Cash 23.16% 8.45% 24.86% 16.26% 74% Owner Earnings 79.02% 35.84% 150.72% 23.05% 0% Net operating cash flow is trending up throughout the years. In 2012, net operating cash decreased 23% because GENTING increased changes in working capital, especially Receivables. As for owner earnings, GENTING managed to recover from negative owner earnings. 4,000,000 Net Ops. Cash Owner Earnings Linear (Net Ops. Cash ) Linear ( Owner Earnings) L. C. Chong Page 3 of 13 http://lcchong.wordpress.com
40% 30% 20% 10% 0% 10% 20% 30% Sustainable Competitive Advantage Rating: Excellent Measure 3 Y Avg. 5 Y Avg. 3 Y % 5 Y % Consistency NPM 10% 18.84% 17.43% 23.25% 28.29% 5% FCF/Sales 5% 16.41% 10.71% 0.05% 0.75% 16% GENTING got economic moats to maintain high NPM (around 18%). Besides, FCF/Sales is also very high as well. 40% 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 NPM 17% 20% 23% 22% 23% 6% 12% 14% 15% 23% FCF/Sales 27% 23% 27% 28% 18% 1% 30% 18% 15% 17% Conservative Debt Rating: Very Good 600% 500% 400% 300% 200% 100% Measure 3 Y Avg. 5 Y Avg. 3 Y % 5 Y % Consistency DCR 150% 20.17% 14.97% 0.02% 0.76% 17% Debt/Eqty. < 56.19% 56.82% 16.73% 1.59% 21% 100% Quick R. 100% 361.15% 379.03% 17.03% 7.90% 0% Even if GENTING has no sufficient cash flow to repay its debts, but it has sufficient assets to repay its debts. Besides, it also has sufficient assets to cover its current liabilities. 0% 100% 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 DCR 46% 29% 50% 24% 88% 1% 20% 20% 21% 20% Debt/Equity 40.94% 46.86% 33.37% 69.25% 40.12% 42.20% 69.18% 66.45% 63.85% 47.55% Quick R. 370% 368% 451% 207% 366% 485% 469% 317% 252% 446% L. C. Chong Page 4 of 13 http://lcchong.wordpress.com
Economic Moats GENTING has the absolute advantage to control its pricing and margin due to its nature of business. Cost Advantage Switching Costs GENTING owns casinos in Malaysia, Singapore, Macau and other places. Especially in Malaysia, unless people go to Singapore, people will most likely stick with GENTING. Even if people go to Singapore, chances are they may go to GENTING s casino as well. Network Effect So far, I don t see any statistics that shows reduce of gamblers. But, I am pretty sure that a lot of people regularly visit GENTING to contribute their hard earn money. Not available or no moat found Intangible Assets Efficient Scale There is only few casino in South East Asia. Thus, GENTING basically monopolizes market of South East Asia. GENTING is the only one casino in Malaysia, thus most of gamblers will have no choice to visit GENTING unless they go to other countries. Reference: http://lcchong.files.wordpress.com/2013/07/cp v30 n2 9.pdf L. C. Chong Page 5 of 13 http://lcchong.wordpress.com
Market Timing Discounted Cash Flows Valuation 3 Y 5 Y 10 Y Good 12% Base 8% Bad 4% Ugly 0% Good 12% Base 8% Bad 4% Ugly 0% Good 12% Base 8% Bad 4% Ugly 0% Fair Value 12.68 11.90 11.18 10.50 13.21 12.11 11.13 10.25 14.04 12.35 10.97 9.84 Buy Under 9.95 9.34 8.78 8.25 10.37 9.51 8.74 8.05 11.02 9.70 8.62 7.73 Actual M.O.S. 26.40% 21.59% 16.51% 11.16% 29.37% 22.94% 16.13% 9.01% 33.53% 24.47% 14.95% 5.16% Refer Appendix 1 Growth rate applied in Reverse DCF to reach the current stock price (9.33): 2% Refer Appendix 2 EY% Valuation EPS QoQ Growth EY% High EY% Low Buffer R4Q EPS FY13 EPS* FY14 EPS* Jun 12 Sep 12 Dec 12 Mar 13 Jun 13 QoQ % 9.24% 5.41% 10% 0.97 0.58 0.68 0.145 0.076 0.670 0.108 0.126 12.79% Fair Value 17.99 10.74 12.62 Refer Appendix 3 Buy Under Sell Above 10.99 6.56 7.71 16.80 10.03 11.79 Insider Trading Comments Refer Appendix 4 Disposed # Securities Price 28/06/2013 100,000 10.39 17/04/2013 100,000 10.38 12/04/2013 100,000 10.20 Grand Total 300,000 10.32 Based on DCF and EY% valuation, I think GENTING still got rooms to grow. Foreign fund institutions are withdrawing their funds from Malaysia, and also quite a big shareholdings of GENTING are owned by foreign fund ins tu ons. Thus, GENTING is impacted by withdrawal of funds. I will accumulate GENTING more if price below 9.0. If GENTING stabilizes above 9.0, I will use technical analysis to accumulate some lots. I do not want to increase my average price too much. L. C. Chong Page 6 of 13 http://lcchong.wordpress.com
Notes Created Date Details Type Source Type 30/08/2013 Risks 1) Regulatory risk; 2) Weaker hold percentage; 3) Pandemic breakouts; 4) Appreciation of RM; and 5) Higherthanexpected cannibalisa on from Marina Bay Sands (MBS) and Macau casinos. Posi ves (1) Defensive stock; and (2) New sources of earnings from interna onal markets to drive earnings growth. Negatives (1) Highly regulated industry; and (2) Leisure and hospitality s earnings highly dependable on luck factor and hold percentage http://klse.i3investor.com/blogs/hleresearch/35995.jsp Outlook;Risk Analyst Report 30/08/2013 In the UK, EBITDA fell by 41.1% YoY to RM97mil in 1HFY13 due to a lower win percentage and provision for bad debts. We gather that the UK division recorded a bad debts provision of RM50mil (12mil pounds) in 2QFY13. http://klse.i3investor.com/blogs/amresearch/36028.jsp Red Flag Analyst Report 29/08/2013 Proposed non renounceable restricted issue of up to 929,871,192 new warrants in GENT ( Warrants ) at an issue price of RM1.50 per Warrant on the basis of 1 Warrant for every 4 existing Shares held by the Company s shareholders ( Proposed Restricted Issue of Warrants ) on an en tlement date to be determined Announcement Quarterly Report http://announcements.bursamalaysia.com/edms/edmsweb.nsf/all/77917cbbbc38538b48257bd6003d440f/$file/propos als.pdf 13/08/2013 Gen ng Bhd Revisi ng its RNAV Genting traditionally trades in line with its RNAV, pricing in the value of its listed and unlisted units. However, since 2009 this has changed because some of its weighting was lost to GENS on the back of Resorts World Sentosa (RWS), which resulted in GENS's market cap overtaking Genting's. However, with the growth prospects of RWS becoming increasingly challenging in contrast to Resorts World Genting (RWG), which is staging a new capex driven growth cycle for GENM, we believe the transition in the re rating of GENM shares versus the de rating of GENS shares should benefit Genting. GENS is an important pillar (45% of Genting's net profit) but no longer a key growth driver to earnings. In contrast, GENM pays out a substantial amount of cash value directly to Genting in the form of management fees. GENM's re rating has greater significance for Gen ng's cash valua ons and not just its equity value in its RNAV. Analysis Analyst Report http://klse.i3investor.com/blogs/cimbresearchklse/34696.jsp L. C. Chong Page 7 of 13 http://lcchong.wordpress.com
Created Date Details Type Source Type 26/07/2013 大馬雲頂世界今日宣布耗資至少 4 億令吉, 與 20 世紀霍士消費產品公司合作, 聯手打造全球首個 20 世紀霍士主題樂園 ( Twentieth Century Fox Theme Park) 此佔地 25 英畝的樂園, 預計在 2016 年投入運作 雲頂大馬公司主席丹斯里林國泰說, 配合新主題樂園建設工程, 雲頂現有戶外遊樂園將從今年 9 月 1 日起關閉, 而新主題樂園開幕後, 預計每年可吸引 600 萬名國內外旅客 Growth Driver Newspaper http://news.sinchew.com.my/node/313178 19/07/2013 Gen ng sells two companies for US$7mil http://klse.i3investor.com/servlets/fdnews/217251.jsp 17/07/2013 Gen ng s Bimini casino ship cleared to woo Miami After several weeks delay, the US Coast Guard has cleared Genting Malaysia Bhd s superfast casino ship to start sailing from Miami, Florida to its casino resort in the Bahamas from this Saturday (July 20), the company said. Announcement Growth Driver Newspaper Newspaper http://www.theedgemalaysia.com/business news/246354 update gentings bimini casino ship cleared to woomiami.html 19/06/2013 Gen ng increases stake in Echo Entertainment Announcement Newspaper http://valueinvestorresearchklse.blogspot.com/2013/06/genting increases stake in echo.html 01/06/2013 I will continue to accumulate GENTING whenever possible as long as it is under 11.00. Note L. C. Chong Page 8 of 13 http://lcchong.wordpress.com
Created Date Details Type Source Type 01/06/2013 h p://klse.i3investor.com/blogs/hleresearch/30804.jsp Group revenue declined by 2.8% yoy largely due to the lower revenue contribution from UK and Singapore casino opera ons. Gaming Division: Volume contraction yoy in UK and Singapore operations were partially offset by the increase in volume from casinos in Malaysia and US. Hospitality Division: The division in Malaysia and Singapore reported growth yoy on the back of higher occupancy rate. However, average room rate in Malaysia declined 3.5% vs. average room rate growth in Singapore of 19.6%. Net wins in RWNY grew 15.8% to US$147/VLT/day compared to US$360 in 1QFY12. RWNY continues to drive its growth momentum by introducing busses to a ract visitors from beyond the proximity of Queens County. Management reaffirmed our view that the development of Resorts World Bimini Bay (RWBB) is an effort to expand GenM s interna onal coverage and help promote and strengthens its foothold in the region. Plantation division s EBITDA declined 36.7% yoy from lower interest income and higher losses at the biotech segment, which altogether more than offset lower losses at Indonesia opera ons. Revenue from power division increased yoy due mainly to higher dispatch from the Meizhou Wan power plant and construction revenue generated from the progressive development of the 660MW coal fired Banten plant. Consequently, EBITDA increased compared with the previous year s corresponding quarter. Analysis;Outlook Analyst Report L. C. Chong Page 9 of 13 http://lcchong.wordpress.com
Appendix 1 Discounted Cash Flows Valuation Discount Rate Margin of Safety Average risk premium Average Risk free rate Unadjusted Discount % Business Risk Factor Financial Risk Factor Discount % Initial RRR Dividend Yield Est. EPS Growth Unadjusted MOS Risk Based MOS 7.60% 3.99% 11.59% 1.01 1.06 12.47% 35% 0% 30% 20% 21% 12% Growth Estimation Financial Figures 7 61 75 21 57 Owner Earnings GR. Terminal % Decay Rate (Yr4E Yr7E) Extra Decay (Yr8E Yr10E) 12% Shares Out. FCF Type 2012 Owner Earnings Excess Cash Intangibles Assets Intangibles% add to DCF 8% 3% 15% 20% 4% 3694.62 Owner 3270.98 22,533.60 6114.30 0% 0% Earnings 2176.80 13,903 50.00% Projection of Future Free Cash Flow and Fair Value Senario 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 FV 2,350.94 2,539.02 2,742.14 2,832.07 3,024.65 3,230.32 3,449.99 3,325.54 3,506.45 3,697.20 DPV 22,747.76 21,844.63 20,977.36 19,264.02 18,293.66 17,372.18 16,497.11 14,139.52 13,256.30 12,428.26 PV 41,798.49 42,902.75 43,963.16 44,020.07 44,730.78 45,405.69 46,046.61 44,988.35 45,323.31 45,637.34 Fair Value 3 Y: 11.90 5 Y: 12.11 10 Y: 12.35 FV 2,438.02 2,730.58 3,058.25 3,210.30 3,537.75 3,898.60 4,296.25 4,077.11 4,409.80 4,769.64 Base 8% Good 12% Bad 4% Ugly 0% DPV 23,590.27 23,492.72 23,395.57 21,836.77 21,396.97 20,966.04 20,543.78 17,335.04 16,671.47 16,033.31 PV 42,718.42 44,779.70 46,832.46 47,280.32 48,806.78 50,302.49 51,768.07 50,152.32 51,020.76 51,855.95 Fair Value 3 Y: 12.68 5 Y: 13.21 10 Y: 14.04 FV 2,263.87 2,354.43 2,448.60 2,488.29 2,572.89 2,660.37 2,750.82 2,698.10 2,771.49 2,846.88 DPV 21,905.25 20,256.48 18,731.80 16,925.60 15,561.34 14,307.05 13,153.85 11,471.80 10,477.77 9,569.88 PV 40,878.55 41,091.23 41,287.89 41,037.05 41,102.78 41,163.21 41,218.77 40,590.91 40,559.72 40,531.24 Fair Value 3 Y: 11.18 5 Y: 11.13 10 Y: 10.97 FV 2,176.80 2,176.80 2,176.80 2,176.80 2,176.80 2,176.80 2,176.80 2,176.80 2,176.80 2,176.80 DPV 21,062.74 18,728.25 16,652.51 14,806.83 13,165.71 11,706.49 10,409.00 9,255.32 8,229.51 7,317.39 PV 39,958.62 39,345.15 38,799.66 38,314.64 37,883.37 37,499.90 37,158.94 36,855.76 36,586.19 36,346.50 Fair Value 3 Y: 10.50 5 Y: 10.25 10 Y: 9.84 L. C. Chong Page 10 of 13 http://lcchong.wordpress.com
Appendix 2 Reverse Discounted Cash Flows Discount Rate Margin of Safety Average risk premium Average Risk free rate Unadjusted Discount % Business Risk Factor Financial Risk Factor Discount % Initial RRR Dividend Yield Est. EPS Growth Unadjusted MOS Risk Based MOS 7.60% 3.44% 11.04% 1.01 1.06 12.47% 35% 0% 12% 20% 21% Growth Estimation Financial Figures 7 61 75 21 57 Owner Earnings GR. Terminal % Decay Rate (Yr4E Yr7E) Extra Decay (Yr8E Yr10E) Shares Out. FCF Type 2012 Owner Earnings Excess Cash Intangibles Assets Intangibles% add to DCF 8% 3% 15% 20% 3694.62 Owner 2176.80 13903.20 6114.30 50% 2% Earnings Projection of Future Free Cash Flow (GR. 2%) 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 FV 2,133.26 2,090.60 2,048.79 2,032.51 1,997.96 1,963.99 1,930.60 1,950.94 1,924.40 1,898.23 DPV 20,641.48 17,986.61 15,673.21 13,825.35 12,084.03 10,562.04 9,231.74 8,294.99 7,275.31 6,380.97 PV 39,498.66 38,496.64 37,623.51 37,046.11 36,415.25 35,863.84 35,381.88 35,207.39 34,856.26 34,548.30 Fair Value 3 Y: 10.18 5 Y: 9.86 10 Y: 9.35 L. C. Chong Page 11 of 13 http://lcchong.wordpress.com
Appenfix 3 EY% Valuation EY% High EY% Low Buffer R4Q EPS FY13 EPS* FY14 EPS* 9.24% 5.41% 10% 0.97 0.58 0.68 Fair Value 17.99 10.74 12.62 Buy Under 10.99 6.56 7.71 Sell Above 16.80 10.03 11.79 * Estimations from Reuters or local analysts' reports High EY% Green Zone EY% 9.24% R4Q FY13 FY14 Green Zone Price($) 10.53 6.29 7.39 Price Low 8.86% Buy Under 10.99 6.56 7.71 10% Trading Range 3.83% 5.79% Sell Above 16.80 10.03 11.79 10% Red Zone EY% 5.41% Red Zone Price($) 17.99 10.74 12.62 Low High L. C. Chong Page 12 of 13 http://lcchong.wordpress.com
Appendix 4 Insider Trading Last 3 months or last 30 insider transactions Transaction Date Securities Holder Type of transaction No of securities Price Transacted 28/06/2013 Tun Mohammed Hanif bin Omar Disposed 100,000 10.39 17/04/2013 Tun Mohammed Hanif bin Omar Disposed 100,000 10.38 12/04/2013 Tun Mohammed Hanif bin Omar Disposed 100,000 10.20 L. C. Chong Page 13 of 13 http://lcchong.wordpress.com