Rolling the dice on growth; upgrade to BUY
3Q23 results above expectations; upgrade to BUY with higher TP of S$1.05
- Upgrade to BUY with higher TP of S$1.05
- 3Q23 results above expectations; VIP and mass gaming volumes above 3Q19’s level; leisure segment nearly fully recovered
- RWS2.0 capex guidance raised to S$6.8bn, up significantly from previous budget of S$4.5bn
- Lift FY23/24F EBITDA estimates to factor stronger-than-anticipated performance
3Q23 EBITDA exceeds expectations, surpassing pre-pandemic levels for the first time since the pandemic. 3Q23 adjusted EBITDA of S$345.4m (+32.5% q-o-q, +36.6% y-o-y) was a positive surprise, topping 3Q19 by 24.2%, with 9MFY23 EBITDA accounting for 81% of our full-year estimate. The group’s robust performance was attributed to broad-based gains across both gaming and leisure segments. Normalised gross gaming volume surged 31% q-o-q to S$715.2m, while net gaming revenue was 27.4% above 3Q19’s level. Although tourist arrivals in Singapore were approximately 77% of pre-pandemic figures in 3Q23, both VIP and mass gaming volumes exceeded 2019 levels, and the leisure segment has nearly fully recovered, reaching 98%, suggesting that the average spending per visitor has increased materially.
GENS’s performance was also commendable against MBS. GENS’s 3Q23 adjusted EBITDA margin of 50.1% was also noteworthy, as it not only surpassed its own 3Q19 EBITDA margin of 46.6% despite an increase in gaming taxes and inflation but also the EBITDA margin of MBS at 48.4% in 3Q23. Furthermore, the group seems to be making decent progress in regaining lost market share from MBS, as its overall gaming market share (measured in normalised gross gaming revenue) climbed to a more normalised 38.7% in 3Q23, up from 33.8% in 1Q23 and 34.4% in 2Q23.
Significant increase in planned investments for RWS2.0 could constrain shareholder returns. The group shared that they expect to invest a total of S$6.8bn (this figure includes amounts already spent on land acquisition, the Minion Land, Singapore Oceanarium) over the next eight years. While we highlighted in previous reports that the investment quantum for RWS2.0 would likely exceed GENS’s initial budget of S$4.5bn by a wide margin due to cost escalation and revisions aimed at attracting the premium mass segment, the updated guidance of S$6.8bn far exceeds our projected range of S$5.0-5.5bn. Although GENS has the financial capability to support this investment through its strong net cash position and robust cash flow generation, we believe this could negatively impact the company’s capacity for capital distribution to shareholders. Moreover, the company has not yet alleviated concerns regarding the ROI for RWS2.0, which is expected to be relatively modest when compared to its historical return on capital.
Raise FY23/24F EBITDA estimate; upgrade to BUY with higher TP of S$1.05. Our FY23F EBITDA forecast increases by 12.6% to account for a stronger-than-anticipated recovery in GENS’s gaming segment and improved cost control, while our FY24F estimate sees a modest upward adjustment of 2.4%. GENS’s share price has declined by 15-20% since our last downgrade to HOLD. Although we remain cautious about the group’s longer-term return on capital prospects, particularly with the substantial rise in projected capex for RWS2.0, we now regard the risk-to-reward as sufficiently appealing. GENS is still trading at around one standard deviation below its five-year pre-pandemic average, despite its solid medium-term earnings outlook (18% CAGR from FY22-25F), with the Forum transformation, and new attractions like the Minion Land, and Oceanarium expected to launch in early-2025.
According to the valuation table below, our DCF-based TP for GENS is negatively affected by the higher capex projections for RWS2.0. However, our overall TP has been raised to S$1.05, reflecting our positive earnings revision and as we roll forward our valuation to 8.3x FY24F (vs 8.3x blended FY23/24F previously) EV/EBITDA. It is important to note that our EV/EBITDA multiple remains conservatively below the street to account for the longer-term risk to the group’s return on capital.