We initiate coverage on Genting Singapore (GENS) with a HOLD call and a DCF-based fair price of S$0.95/share, which implies a target 2011 EV/EBITDA of 12.7x. While we believe Resorts World@Singapore (RWS) could trounce consensus forecasts in its maiden year as a casino operator in Singapore in 2010, a peakish market outlook could prompt investors to cash in following GENS' 98.9% ytd price appreciation. We expect GENS to trade in the S$0.90-0.95 range, with the top end having already factored in continuity of the Singapore casino licence and scarcity premium for comparable Asian gaming-consumer plays. As our fair price has limited upside potential, we recommend HOLD with an entry price of S$0.80.
Earnings on a roll. We project GENS' earnings to surge 210.0% and 50.3% to S$295.2m and S$443.8m in 2010-11 as RWS' casino operations go into full swing by 1Q10, ahead of rival Singapore casino operator Marina Bay Sands. GEN could beat consensus forecasts of S$105.3m given its first-mover advantage, and with the partial deferment of expansion of the less profitable non-gaming operations.
Leveraging on Asia's sizeable VIP and Singapore's domestic gaming markets. RWS should be able to capture 5.0% of Asia's VIP market (estimated at US$9b-10b p.a.) and 12.5% of Singapore's gaming market (estimated at S$9b-10b p.a.). This excludes the full grind market potential which RWS could tap from neighbouring countries such as Malaysia, Indonesia, and possibly even China. This is based on the premise of RWS' strong global network, favourable tax structure and strategic location in Asia.
Quick wins and high margins at RWS. The S$5.6b RWS project promises a good payback period of 8-9 years, riding on Singapore's favourable gaming tax structure which gives RWS an advantage over its competitors in Australia and Macau in the high roller segment. Meanwhile, the non-gaming division (principally Universal Studios) should eventually attain decent returns, judging from Universal Studios Japan's achievements in recent years.
UK business' run of bad luck should turn by 2011. GENS' UK business is projected to recover only in 2011 due to the UK's prolonged economic slowdown and adverse regulatory environment. Still, earnings could post apositive surprise as 2008's streamlining and restructuring exercises could save up to £10m annually, but the upside is not significant to group earnings.
Impacts on Genting. We expect Genting's earnings growth to gain momentum in 2010 and 2011, boosted by RWS' contributions. We forecast Genting's 2010 and 2011 EBIT growth at 80% and 17% yoy, mainly as RWS' contribution to group EBIT rises to 32.9% and 37.5% respectively (reversing losses in 2009). We recommend buying into share price weakness (with target price of RM7.60) as Genting will be the cheaper entry point to RWS' future earning growth potential.
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