4Q21: Better Capital Management In Sight
GENS’ 4Q21 results came in below our expectations as the Omicron outbreak stalled authorities’ initial endeavours to relax social distancing measures and border restrictions. Positively, Singapore has reinstated progressive reopening of its borders via VTLs with multiple countries and loosening its social prohibitions. More importantly, cash-rich GENS plans to enhance its capital management efforts. Maintain
BUY. Target: S$1.08.
RESULTS
• Lacklustre 4Q21 results that underperformed rival MBS. Genting Singapore’s (GENS) 4Q21 results revealed that Resort World Sentosa’s (RWS) gaming revenue declined significantly (-15% qoq) from 3Q21 and underperformed rival Marina Bay Sands’ (MBS) qoq gaming revenue improvement of 68% from a low base. Adjusted EBITDA fell more than revenue to S$69m (-67% yoy, -32% qoq), missing our and consensus’ expectations. 2021 net profit represents only about 87% and 90% of our and consensus’ full-year forecasts respectively. The earnings disappointment reflected soft gaming volume, lower government subsidies and presumably lower win rate and closure costs associated to its abandoned bid
for Japan’s gaming concession.
• Soft gaming revenue reflects tightened SOP and lower VIP volumes. While the company does not provide gaming statistics, we reckon that both the mass market and VIP volumes fell in 4Q21. Stringent social distancing set-ups (two players per gaming table, alternate slots and electronic table games machines) in Oct-Nov 21 lowered gaming capacity, while the emergence of the Omicron variant in 4Q21 caused a rise in local community cases. VIP volumes also contracted as many local gamers presumably took advantage of travel bubbles during the holiday season to travel overseas.
• Final DPS disappointed. GENS declared a 1 S cent final DPS (4Q19: 2.5 S cents), implying a full-year yield of 1.3%. Recall that GENS did not declare any interim DPS in the previous quarters this year (2Q19: 1.5 S cents), mainly due to lacklustre operational profit in 9M21.
STOCK IMPACT
• Significantly better capital management moving forward? With GENS finally dropping its decade-long pursuit of clinching a pricey Japan integrated resort (IR) concession, and with no new compelling projects to consider, management is targeting to enhance capital management and to develop a dividend policy. Theoretically, the scope of the company’s capital management can be significant, considering its net cash of S$ 3.3b (27 S cents/share) and that post-pandemic EBITDA is largely sufficient to fund its S$4.5b RWS
2.0 expansion.
• Bidding sayonara to Japan’s IR pursuit. In Dec 21, GENS announced that it plans to shut down an aggregate of eight subsidiaries incorporated in Japan, officially ending GENS’ bidding in Japan’s IR concession. To recall, despite expressing deep interest on clinching a Japan IR, GENS did not submit its Request For Proposal (RFP) application before the deadline and withdrew from the Osaka bid in Feb 20. In Aug 2021, GENS’ Yokohama IR bid was also scrapped following hardline anti-IR campaigner Takeharu Yamanaka winning Yokohama’s mayoral election.
• A laggard among beneficiaries of border reopening; Omicron variant disruptions transitory. While the emergence of the Omicron variant has stalled the recovery of GENS, we take the view that most countries will gradually re-open their borders in 1H22 as hospitalisation and death rates remain relatively low.
• SOP relaxations and VTL initiations a symbolic step towards normalcy restoration. While Singapore has transitioned to its COVID-19 Resilience Phase since Nov 21, the nation has further relaxed some of its cumbersome standard operating procedures (SOP) and RWS has been allowed to operate with higher gaming capacity since Dec 21. Singapore has also piloted quarantine-free vaccinated travel lanes (VTL) with >20 countries and is looking to fully restore VTL quotas with Malaysia from Feb 22. These VTL countries contributed to >60% of the total daily arrivals at Changi Airport in 2019.
• S$4.5b expansion plan back on track. Recall that RWS had committed to the Singapore government to spend S$4.5b over five years to elevate the resort’s vibrancy. For the first phase of RWS 2.0, GENS will be investing S$400m in capex for the construction of Universal Studios Singapore’s Minion Land, the Singapore Oceanarium, as well as refurbishment of its three hotels beginning 2Q22.
EARNINGS REVISION/RISK
• We have reduced our 2022 EBITDA estimate by 25%, following the later-than-expected relaxation of borders which was previously disrupted by the emergence of the Omicron variant.
VALUATION/RECOMMENDATION
• Maintain BUY with an unchanged target price of S$1.08, which implies 8.8x 2023F EV/EBITDA (-0.5 below SD). We expect the stock to re-rate in reaction to Singapore’s gradual border reopening. Theoretically, GENS share price could reach S$1.08 in 2023 in the scenario of GENS’s EBITDA clawing its way back to the pre-pandemic level of S$1.2b.
• Dividend yield expected to normalise to 4.7% in 2023, assuming revenue and cash flows recover back to pre-pandemic levels, and that GENS restores its 2019 dividend payout level of 4.0 S cents. Theoretically, our projected 2023 after-tax EBITDA is sufficient to fund a DPS of 4.0 S cents (4.7% of 2023 yield).