Genting - Another rights issue, looking to raise up to S$1.6bn; retain Sell

Genting Singapore announced today a fully underwritten 1-for-5 rights issue at S$0.80 per share, a 33% discount to the closing price as of Sept 8. The rights issue will result in c.1.9bn new shares, potentially reaching as many as 2bn new shares assuming full conversion of its existing in-themoney convertible bonds. Gross proceeds could amount to S$1.63bn, of which the group plans to use 40% of proceeds for working capital and pay down debt, remainder of cash is to be deployed for future investments.

Shares will trade ex-rights on 18 Sept. The rights issue will be its second post its Singapore Integrated Resort win; the first was back in 2007, when S$2bn was raised to partly finance the project. Major shareholder Genting (54.3%) has agreed to subscribe to its pro rata share in full.

On a pro forma basis, our net debt to equity estimate for 2010E (first year of operation of its Singapore Integrated Resort) would be reduced from 144% to 83%, more comparable to our GS gaming coverage universe’s 2010E industry median 74% net gearing levels. There would likely be someEPS dilution assuming interest savings (1.2%/5% in 2010E/2011E), partly mitigated by the pretty comparable cost of equity vs. debt, in our view. We see the rights issue as pre-emptive move to strengthen its balance sheet, especially the planned 40% rights proceeds deployment: c.S$650m would be very useful to help bridge the funding gap for the Integrated Resort. Recall Genting Singapore secured only S$6bn funding vs. a project cost S$6.59bn, and management had earlier planned for a strong first year cash flow generation to help meet the funding gap, assuming no cost overrun. We think the market may be too optimistic on Singapore gaming demand and the competitive outlook.

Shares having risen substantially, much inflated by undue investor optimism on the Singapore Integrated Resort, and we think the rights issue is likely to weigh on Genting Singapore shares. Retain Sell rating and target price.

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