2Q22: Best Quarterly Revenue; Catalysts Abound In 2H22
GENS’ 2Q22 results were within expectation, recording the best quarterly revenue (55% of pre-pandemic levels) since the pandemic, but the earnings recovery predictably lags rival MBS’ due to weaker luck factor, labour shortage issues and closure of Festive hotel. We remain upbeat on 2H22’s recovery following Singapore’s border reopening and further loosening of social prohibitions. Cash-rich GENS plans to enhance its capital management efforts. Target price: S$1.08.
RESULTS
• 2Q22: The best quarter for gaming revenues since the onset of the pandemic. Genting Singapore’s (GENS) 2Q22 results revealed that Resort World Sentosa’s (RWS) revenue recovered (+11% qoq, 26% yoy). Despite the revenue recovery, 2Q22’s adjusted EBITDA of S$144m (-3% yoy; +15% qoq) predictably underperformed rival Marina Bay Sands’ (MBS) due to lower GGR market share (GENS: 35% vs MBS: 65%) and weaker VIP luck factor (GENS: 1.5% vs MBS: 4.29%). While 1H22 EBITDA represented 35% and 37% of our and consensus full-year forecasts, we anticipate a sharper recovery in 2H22 following the region’s economic reopening.
• Strong mass market gaming revenue recovery masked by poor luck factor. Gaming revenue recovered 7% yoy to represent 54% of pre-pandemic levels. An exceptionally poor VIP win percentage masked a more robust qoq growth in gaming volume and mass market revenue (which we estimate to have grown 15-20% qoq). We expect further gross gaming revenue (GGR) recovery in 2H22 with the government scrapping the requirement of predeparture tests for inbound travelers from 26 Apr onwards.
• Restored interim DPS of 1 S cents. Positively, GENS declared interim DPS of 1.0 S cents in 2Q22 (2Q21: none), implying a yield of 1.2%.
STOCK IMPACT
• Prominent GGR recovery following Singapore’s revitalised tourism market. To note, Singapore’s 1H22 tourist arrivals exceeded 1.5m, and the Singapore Tourism board (STB) expects visitor arrivals to reach 4m-6m for 2022. Despite the 1H22 tourist arrival numbers remaining a fraction (16%) of pre-pandemic figures, June’s tourist arrival recovered to >35% of pre-pandemic levels. We expect GENS’ GGR to significantly recover in 2H22 in tandem with the influx of international visitors. Overall, we expect GENS’ GGR to recover to about 70% of 2019’s level and fully resurrect its pre-pandemic GGR in 2023 after China’s borders reopening.
• Upbeat on China patronage’s reinstatement. We retain our view that China’s eventual border reopening remains as a strong rerating catalyst for GENS to restore its pre-pandemic earnings dynamic. To recap, China visitors historically make up about 19-20% of Singapore’s pre-pandemic tourist arrival in 2018-19. We think that Chinese footfall made up about 20% of RWS’ footfall and 20-25% of GENS’ top-line revenue. Moving forward, we expect China to ease travel restrictions from 4Q21-1Q23 onwards. China’s pent-up demand may allow GENS to potentially deliver above pre-pandemic earnings that could trounce our earnings estimates.
• Well-positioned to fulfil better capital management particularly in 2H22. With GENS finally dropping its decade-long pursuit of clinching a pricey Japan 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$ 3.1b (26 S cents/share) and that post-pandemic EBITDA is largely sufficient to fund its S$4.5b RWS 2.0 expansion.
• S$4.5b expansion plan back on track. Recall RWS’ commitment to spend S$4.5b (RWS 2.0) 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. We understand that construction works on both Minion Land and the Singapore Oceanarium are on track to start in 2H22.
EARNINGS REVISION/RISK
• None.
VALUATION/RECOMMENDATION
• Maintain BUY with an unchanged target price of S$1.08, which implies 8x 2023F EV/EBITDA (-1SD below mean). We expect the stock to re-rate in reaction to Singapore’s tourism recovery. With the world eventually fully unwinding COVID-19 curbs, and presumably including China by 4Q22-1Q23, we expect GENS’ EBITDA to claw back to the pre-pandemic level of S$1.2b in 2023 as the worst is likely over.
• Normalisation of lush prospective yield to 4.1-4.9% in 2022-23, assuming revenue and cash flows recover back to pre-pandemic levels. Meanwhile, we expect GENS to deliver significantly better dividends in 2H22. Theoretically, our projected 2022 after tax EBITDA is sufficient to fund a final DPS of 2.0 S cents (2.4% 2022F yield).
• Theoretically, our target price for GENS would rise to S$1.22 once our valuation horizon rolls over to 2023, assuming EBITDA recovers to S$1.2b and historical mean EV/EBITDA valuation of 10x.
SHARE PRICE CATALYST
• We believe market should turn more positive towards GENS with the core profitability recovery and appealing dividend yield which promises defensiveness amid current market volatility. Re-rating catalysts for GENS include: a) further core earnings improvement, b) China’s reopening of its borders, and c) GENS making good utilisation of its big cash pile for some sizeable acquisition or paying special dividend.