Sharp rally in Genting group shares unwarranted; reduce positions

Genting shares rally post recent MGM senior notes investment Genting-related shares have rallied 12-15%, since Genting and Resorts World’s 20 May announcement that both agreed to subscribe for US$50m each (two equal US$25m tranches, 10.375/11.125% notes due May 2014/November 2017 respectively) of MGM Mirage’s (MGM) issues for US$1.5bn senior secured notes. Though Genting and Resorts World have stated the move is to boost yields on excess cash, Bloomberg reported that there is market speculation that the investment could be prelude to a potential expansion of the Genting group to Macau. In response, both Genting and Resorts World stated on May 26 that the group constantly evaluates/reviews potential investment opportunities.

Following MGM’s application to renew its Atlantic City casino license, the New Jersey Division of Gaming Enforcement recommended last week for MGM to sever ties with its MGM Grand Macau JV partner, Pancy Ho, who the board deemed as ‘unsuitable’. This has led to market speculation that the Genting group could be seen as a potential candidate for any potential stake disposal in the Macau JV, given the Genting group has in the past stated its interest in expanding into Macau. However, we see both MGM and Pancy Ho deliberating the matter with the New Jersey board, which will likely take time. We think the situation remains highly fluid, and it is too soon to expect any outcome. We recommend investors to reduce positions on the back of recent strength in Genting group shares.

Assuming there could be potential expansion opportunities, we think it is more likely Resorts World (Neutral, 12-m SOTP-based PT: MYR2.50), which has the balance sheet capacity (MYR4.6bn net cash end-08) to be the acquisition vehicle. Currently our preferred pick within Genting group, Resorts’ valuations are undemanding at 6X 2009 EV/EBITDA vs 9X historical average. No change to our Neutral on Genting, 12-m NAV-based TP of MYR4.10. For Genting Singapore, we retain Neutral, but revise our SOTP-based 12-m PT to S$0.44 from S$0.37, largely as we roll over to 2010E. Following detailed review of its 1QFY2009 results, we have raised 2009 earnings by 50%, mainly as we expect Genting Singapore to charge less pre-opening expenses to P&L this year. Key upside/downside risks: Singapore casino opening, gaming revenue demand, potential M&A investments, weaker/better economic recovery.

Sponsored Links

Related Posts by Categories