Genting - A $3 stock?

We are very bullish on Singapore’s forthcoming casino market and our estimates are well above consensus. However, we have erred on the side of caution for each individual assumption. Discussing our bottom-up estimates with investors, we have concluded that there exists significant further upside. As an example we have assumed an ebitda margin of 40% vs. management guidance of 50%. We have run a number of blue sky scenarios which implies the stock could be worth as much as S$3.

We currently forecast Singapore gaming revenues of US$3.2bn. This suggests that Macau will be four times the size. We believe this implies our estimates are conservative if we consider the large potential of the South East Asian including the local Singaporean market. If we assumed Macau to be 3x or 2x the size of Singapore, then our new price targets would be S$1.61 and S$2.45 respectively.

In our recent report titled Handful of aces, we provide a bottom-up framework for estimating the size of the market – looking at number of casino visitors and average spend by customer group including locals; foreign visitors, VIPs and Malaysian day-trippers. In each case, we have erred on the side of caution. Should we take slightly less conservative assumptions for a number of these parameters we end up with a range of new price targets from S$1.32 to S$1.80.

Should we boost our Ebitda margin assumptions to management guidance of 50% (from 40%) then our price target would be S$1.40. Market share of 50% vs. 46% would boost our price target to S$1.20.

Should we add up a number of our more aggressive revenues assumptions and apply higher margins, we arrive at a price target of $2.37. We have assumed 12x ebitda. Applying 15x to existing estimates results in a price target of S$2.37. Then applying this multiple to our sum of our bottom-up blue sky assumptions we arrive at a target S$3.

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