Genting Singapore's better-than-expected 3QFY2023 earnings announced last week has sent its share price up by 7.06% to 91 cents as at 9.36am today, even as analysts have mixed reactions over the revised expansion budget that is significantly higher than earlier indicated, as the resort operator chose to focus on higher-end offerings amid a general increase in costs.
Genting Singapore's $6.8 billion expansion spend, announced by the company on Nov 10, far exceeds the $5 - $5.5 billion capex projected by DBS Group Research and the $4.5 billion announced back in April 2019.
In an updated research note on Nov 14, DBS's Jason Sum is of the view that Genting Singapore G13 's near-term prospects remain bright as sustained momentum in tourist arrivals should enable footfall at RWS to normalise by early to mid-2024, while pent-up demand should also translate to higher spending per visitor.
Sum believes further earnings growth can be generated with improved accessibility into Sentosa, addition of more gaming areas, hotel capacity, new and refreshed attractions as well as retail and dining options.
"Additionally, top-line growth and operating margins could surpass expectations if Genting Singapore successfully executes its strategy to attract more premium mass market customers," he adds.
While he remains cautious about how the higher-than-expected capex will affect longer-term return on capital, the analyst finds the risk-to-reward profile attractive. "We believe this risk is adequately priced in," says Sum, who has upgraded his call on the stock from "hold" to "buy".
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"The stock’s compelling valuation at one standard deviation below its five-year pre-Covid average and solid medium-term earnings outlook (18% CAGR between FY22-25F) underpins our positive stance," says Sum.
His new target price of $1.05, from $1 previously, is based on a blended valuation framework of forward EV/EBITDA of 8.3x on FY2024 estimates, and discounted cash flow (DCF), assuming 8.2% WACC, 7.5x terminal EV/EBITDA multiple.
IR 2.0s
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Under what has been dubbed RWS2.0, both Genting Singapore and Las Vegas Sands Corp will spend at least $4.5 billion each to expand and upgrade their respective integrated resorts here in Singapore in return for an extension of the gaming exclusivity licensing from the government.
At the company's AGM on April 19, Genting Singapore CEO Tan Hee Teck had explained the need to refresh and expand the resort.
“We must reposition ourselves by catering to the wealthier market segment of visitors. We have to transform ourselves to be a better product,” says Tan. “This $4.5 billion has to be funded from somewhere,” adds Tan, when asked why didn't Genting Singapore pay higher dividends than the three cents it declared for the whole of FY2022.
For the three months to Sept 2023, Genting Singapore reported earnings of $216.3 million, up 59% y-o-y. Ebitda, in the same period, was up 37% y-o-y to $346.1 million while revenue was up 33% y-o-y to $689.9 million.
DBS notes that revenue and ebitda have reached 115% and 124%, respectively, of the levels of the pre-pandemic 3Q19, despite attendance not yet fully rebounding, with Singapore’s tourist arrivals for the quarter at just 77% of the pre-pandemic figures.
"This suggests a substantial increase in the average spending per visitor at RWS. 3QFY2023 also marks the first instance of Genting Singapore reporting gaming volumes and ebitda that surpass pre-pandemic figures, a milestone Marina Bay Sands had previously achieved in 1Q23," adds DBS, noting that Genting Singapore had gained gaming revenue market share, reaching 33% in 3QFY2023 versus 30% in 1QFY2023.
"We expect Genting Singapore's earnings growth to continue in the short term, bolstered by increased tourist arrivals and the early 2025 soft launches of the Forum's transformation, Minion Land at USS, and the Singapore Oceanarium," adds DBS.
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CGS-CIMB's Tay Wee Kuang is similarly upbeat about with this counter.
"We think that Genting Singapore's strategy to premiumise its offerings is paying off, given 3Q23’s profitability surp assing 3QFY2019’s despite Singapore seeing 20% lower tourist arrivals.
"This also suggests that the Singapore tourism landscape has shifted towards attracting a greater proportion of wealthier tourists, which justifies its revised $6.8 billion capex budget over the next 8 years," says Tay, who has kept his "add" call and $1.30 target price.
For Citi Research's George Choi and Ryan Cheung, Genting Singapore's 3QFY2023 results was a "solid beat", prompting them to raise their earnings forecast for FY2023 to FY2025 by 1 and 13%.
However, to take into account the higher capex of $6.8 billion, they have trimmed their target price from $1.26 to $1.20 while keeping their "buy" call.
Choi and Cheung estimate that Genting Singapore has already spent some $1.6 billion to date and that investors have already priced in the increase in capex.
They note that Genting Singapore is trading at around 5.7x FY24E EV/EBITDA, which is more than 1 s.d below its historical average of around 7.9x.
"We still like the stock as we believe Resorts World Sentosa is one of the major beneficiaries from the return of inbound visitors," note Choi and Cheung in their Nov 13 report.
A possible dividend hike from 3 cents paid for FY2022 to 4 cents for FY2023 is another reason for investors to buy this stock, they add.
Yin Shao Yang of Maybank Securities, meanwhile, is cheered by the better-than-expected 3QFY2023 earnings, where both the mass market and VIP gaming segments did well.
He notes that 3QFY2023 VIP volume was 55% higher than what he was projecting and that this volume was the highest since 2QFY2015.
The analyst, citing Genting Singapore, points out that growth in the gaming segment was "broad-based" and not reliant on "any one source".
He also points out that 3QFY2023 VIP and mass market gaming revenue had already exceeded the pre-pandemic 3QFY2019 levels.
"Genting Singapore expects operations to continue to improve as seat capacity from major source markets to Singapore continues to recover," says Yin, who has kept his "buy" call on this counter.
The $6.8 billion expansion, the analyst notes, is a higher amount but will be scheduled for completion in FY2031 instead of FY2028 - FY2029 as previously indicated.
Yin has raised his FY2023 to FY2025 core earnings estimate by 12% - 6%, thereby raising his target price to $1.16 from $1.12.
Jack Goh of UOB Kay Hian is similarly positive about this stock, and is looking forward to the expansion plans.
"We retain our view that RWS’ ongoing revamp will allow it to capitalise on the thus-far sustained higher spending per capita at the integrated resort, with the premiumisation being led by its non-gaming segment," says Goh in his Nov 14 note.
"Spending per capita has also risen markedly since Singapore emerged from the Covid-19-related lockdown, with spending at the theme park and average hotel room rate rising around 20% and more than 50% from pre-pandemic levels," he adds.
Goh believes that with the pandemic-related disruptions coming to a tail end, the management now has more flexibility to better utilise its sizeable capital which includes net cash of $3.4 billion, which works out to 28.6 cent cents per share.
"After dropping its decade-long pursuit of clinching a pricey Japan IR concession last year, and with no new compelling projects to consider, we also do not rule out GENS exploring potential brownfield and greenfield opportunities in the region," says Goh, who has kept his "buy" call and $1.25 target price.
