Genting International - Sentosa’s blue skies

Raise forecasts. We have raised our earnings forecast for 2010 by 160% because we now assume a full year of earnings from Sentosa, as opposed to our old assumption of six months of earnings. We have also doubled our assumption of VIP revenue from S$300m pa to S$600m pa, following our recent visit and reassessment of the regional VIP market (see Regional Gaming, Two if by land, three if by sea dated 15 July 2009).

Raise target price. We have lifted our target price from S$0.70 to S$1.14 to take into account the earnings upgrades, and also because we have rolled our DCF valuation forward to 2010.

Blue skies ahead. There is still potential upside to our forecasts. We are still assuming a conservative mass market size of S$2.4bn (US$1.6bn) of which we assume Sentosa will conservatively capture 50%. There are no data points currently for the mass market, so we have refrained from making more aggressive assumptions.

However, in Malaysia, the mass market is worth some US$1.0-1.1bn (out of total gaming revenue of US$1.2bn). Singapore has double the addressable population, and three times the income level in Malaysia. Even if Singaporeans had half the Malaysia propensity to gamble, we would be looking at a mass market size of some US$3-3.3bn (S$4.5-4.9bn). If this turned out to be true, we would have to raise our EPS forecast for 2010 by more than double and our DCF valuation would rise to S$2.66. Earnings and target price revision

We have raised our 2010 earnings forecast by 160% and 2011 by 17%. 12-month price target: S$1.14 based on a DCF methodology. Outperform reiterated. We raise our DCF-based TP to S$1.14. We conservatively assume a 10% WACC and terminal growth rate of 2%. The implied target EV/EBITDA is 12x 2011E, in line with global peers. A cheaper entry is via parent Genting (GENT MK, RM6.68, Outperform, TP: RM7.50).

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