In line quarter despite bad luck; resumption of interim dividend
- 2QFY22 results would have topped expectations if not for bad luck. 2QFY22 adjusted EBITDA came in at S$147.1m (-0.6% y-o-y, +20.9% q-o-q), bringing 1HFY22 adjusted EBITDA to S$268.7m, accounting for 40.4% of our full-year estimate. However, on a hold-normalised basis (VIP win rate of 1.5% in 2QFY22 vs normal range of 2.9-3.2%), EBITDA would have amounted to S$182.2m in 2QFY22; 1HFY22 hold-normalised EBITDA of S$289.0m accounted for 43.5% of our full-year estimate and is slightly above expectations given that we anticipate a more pronounced recovery in 2HFY22. Adjusted EBITDA would also have been higher as GENS ceded some market share due to a lack of manpower as well.
- On the surface, GENS’s performance may look disappointing relative to MBS… MBS had a stellar 2QFY22, with adjusted EBITDA growing by 184.8% y-o-y and 163.6% y-o-y to US$319m. Operationally, MBS saw an increase in overall gross gaming market share to 65% from 55-60% previously, with mass gaming revenue/rolling volumes hitting 91% and 75% of 2QFY19’s level respectively.
- But GENS’s hold-normalised EBITDA was on-par with MBS. MBS booked hold-normalised EBITDA of US$278m in 2QFY22, representing 80.3% of 2019’s level. Similarly, GENS’s hold-normalised EBITDA reached 79.2% of 2019’s level in 2QFY22.
- EBITDA margin strengthened despite inflationary pressures and rise in gaming tax. GENS achieved an EBITDA margin of 42.2% in 2QFY22, up sequentially from 38.7% in 1QFY22. This was despite a 3% increase in Singapore’s gaming tax in both the premium and non-premium segments, steep increase in utility tariffs, and lower degree of government grants during the period.
- Resumption of interim dividend. GENS declared an interim dividend of 1.0Scts per share (vs 1.5Scts per share in 1HFY19), which was in-line with our expectations.
- Manpower is a major challenge. Management highlighted that underlying demand was robust, but they were unable to fully capture demand due to capacity issues during the period. GENS currently has about 5,000 employees, as compared to 7,000-8,000 prior to the pandemic, and is targeting to hire 1,600 new employees by end-2022 to meet an imminent rebound in demand. Although the local job market is incredibly tight, the government has been providing support by facilitating the employment of foreigners.
- Operating margins could take longer to normalise because of inflation. Management highlighted that there may be some margin deterioration in the coming quarters as GENS due to fierce competition for manpower and sticky inflationary pressures.
- Upbeat on near-term prospects; increase in dividends on the cards. Despite the abovementioned challenges, there was a positive shift in the management’s tone on GENS’s near-term outlook, with the management expressing their confidence in delivering solid results over the short and medium-term on the back of a robust pipeline of MICE events in 2HFY22 and sustained rebound in inbound tourists. Additionally, the management also shared that investors can expect GENS’s dividend payout to be more generous moving forward.
Earnings revision and recommendation
- FY22/23F revenue and EBITDA estimates largely unchanged. Although we are tweaking up our revenue estimates slightly after factoring in a quicker turnaround in gaming/non-gaming revenue, our EBITDA projections are unaffected as we pencil in slower margin improvement owing to the abovementioned cost headwinds. Our dividend per share projections remain unchanged at 2.0/3.0Scts per share in FY22/23F respectively, though there may be some upside to our estimates.
- Maintain BUY with unchanged TP of S$1.00. Our TP remains unchanged even though we are rolling forward our EV/EBITDA peg to 10x blended FY22/23F EBITDA (from 11x FY22F previously) as we raise our cost of capital assumption in our discounted cash flow valuation to 8.0% from 7.5% previously. We continue to like the stock as sustained momentum on the reopening front in Asia and globally will continue to benefit GENS, and the company’s valuation remains attractive at 8.2x EV/forward EBITDA.