Genting - Another buying opportunity

In a surprise announcement, Singapore-listed GENS is proposing a S$1.63bn 1-for-5 rights issue at S$0.80 each. In a statement, GENS said the rights issue was being undertaken to pro-actively strengthen its balance sheet, enhance its financial flexibility and competitive position, and facilitate future business expansion. We think otherwise. Given the anticipated strong cash flow from the IR project, GENS is not in urgent need of cash, in our view.

The rights issue is the second for GENS in the past two years and comes after the controlling shareholder, the Lim family, completely divested its direct stake in the company at around S$0.71/share.

It is a different story for Genting. It will get to raise its investment in GENS at a 33% discount to the market price by subscribing to its portion of the rights shares at S$0.80/share.

We maintain our view that GENS’s IR will be a great success. At the S$0.80/share rights issue price, GENS’s EV is roughly about S$17bn. Strong cash flow from the IR project could easily help Genting raise funding for its portion of the rights issue at around S$0.88bn. As of December 2008, Genting’s own cash reserves, excluding those held by subsidiaries, are estimated at less than S$400mn.

Genting shares have reacted negatively to the rights issue. However, we view this as another opportunity to buy the stock.

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