Genting Spore: Raise TP $1.40 (pre rights) $1.30 (post rights)

1-for-5 renounceable rights at 80cent (33% discount to 8-Sep-2009 closing price of S$1.19), fully underwritten. 40% of S$1.63b proceeds would be used to pare down borrowings (reducing 2009F net gearing to 2.5x from 4.0x) and 60% for future investments (could include Resorts World at Sentosa's S$600m Western Zone which was supposed to be funded by operating cashflows). We believe GENS' immediate focus would be to complete RWS (still on-track and within budget), while keeping the option to look at potential opportunities.

Marginal dilutive impact, although share base would increase by up to 2m shares or 21% to 11.7b. If 40% of proceeds is used for reducing borrowings, we estimate a 9-11% dilution to 2010-11F EPS (potentially less if future acquisitions are accretive), supported by S$29m of interest savings. If the entire amount is used instead, we expect 2-7% dilutive impact. More importantly, the rights issue would reduce financial risk and interest cost pressure on earnings/cashflow.

Remain positive on RWS' prospects. We have revised our 2009-11F earnings to factor in a 12-month contribution in the first year of operations (vs 11 months) and a lower depreciation rate (assuming capex would be equally spread over 30 years vs 7% based on Genting Malaysia's used previously). Maintain BUY, and raise sum-of-parts TP to S$1.30 (assuming 7% WACC, 1.5% long-term growth). GENS remains the cheapest gaming stock on PEG basis (0.41x vs sector average 0.65x).

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