Genting Singapore: Placing bets too early

Genting's phenomenal winning streak. Genting Singapore (Genting), after hitting a low of S$0.41 in mid-February, has been on a winning streak ever since, chalking up gains of nearly 116%; this despite posting a wider 1Q09 net loss of S$31.9m vs. net loss of S$12.7m recorded in the year ago quarter. One possible reason could be growing optimism from the opening of its integrated resort - Resorts World @ Sentosa (RWS) - in early 1Q10, which should coincide with the expected recovery in the global economies going by most economists' forecasts.

Asia gaming market - most promising. In addition, many investors are probably upbeat about its potential market here in Asia, which industry watchers believe is without doubt the most promising - growing at 15.7% CAGR for the next five years1. According to a PricewaterhouseCoopers' (PWC) report, gaming revenue in Asia hit US$15.6b in 2007 and is expected to grow to US$30.3b in 2011. However, PWC noted that competition is also widely expected to heat up, as more countries mull the possibility of either setting up their own casinos (like Taiwan, Japan and even Thailand) or expanding the number of existing ones (South Korea).

UK operations may continue to languish. On the other hand, Genting's UK operations could continue to languish, given the dismal economy there. Latest official data showed that UK's economy shrank by 1.9% in 1Q09, while household spending fell by 1.2%, the biggest drop since 1980. Theofficial forecast is for the UK economy to contract by 3.5% this year. As such, we continue to pencil in a loss for its operations there this year.

Maintain SELL. In line with the recent re-rating of global equity markets as well as the improvement in risk appetite, we have bumped up our FY10 estimates and in the process, raised our fair value from S$0.45 to S$0.76.But realistically, we think that the turnaround would probably come in FY11. In the meantime, Genting may have to also content with higher interest payments as it continues to draw down its S$4b loan. Meanwhile, we do not think that Genting will be making a bid for the MGM Mirage Macau asset sale, as the issue can be quite sensitive. Back in 2007, Genting and Star Cruises had proposed a casino venture in Macau with Stanley Ho but the deal was later called off after the group received an adverse response from the Singapore government. Maintain SELL.

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Neptune Orient Lines Ltd: Still in the red

Deeper in the red. Neptune Orient Lines Ltd (NOL) turned in a poor set of 1Q09 results. The group reported a net loss of US$244.6m vs. a US$120.7m profit a year ago. 1Q09 losses were wider than the US$148.5m loss incurred in 4Q08. Revenue slumped 35.9% YoY and 32.6% QoQ to US$1.5b. Key culprits for NOL's weak performance were the slump in global trade flows coupled with deteriorating freight rates across all trade lanes. A reduction in non-recurring gains from asset disposals (US$3m in 1Q09 vs. US$18m in 1Q08) magnified the slump in earnings. The group's poor performance led to a net operating cash outflow of US$139.4m in 1Q09 as compared to an inflow of US$212.9m a year ago.

Revenue declined across all segments. Container Shipping, the group's key revenue contributor, saw revenue slide 35.9% YoY to US$1.3b on the back of depressed freight rates and lower demand for container freight. Average revenue per FEU (Forty-foot Equivalent Unit) has fallen 16% YTD owing to lower bunker recovery and core freight rates, while volume handled has slumped 27% as a result of the global economic downturn. Utilisation of its container shipping network continued heading south despite the group's capacity reduction efforts, coming in at just 80% in 1Q09 as compared to 95% in 1Q08 and 83% in 4Q08 (exhibit 1). This brings the group's utilisation rate down to levels seen during the previous crisis in 2002. The Logistics and Terminals segments similarly suffered revenue contraction as a result of lower throughput volumes. Revenue from Logistics declined 33.6% YoY to US$241m while that from Terminals fell 22.8% to US$112m.

Not out of the woods yet. While NOL has been taking proactive measures to contain costs and improve asset utilisation, these have not been sufficient to mitigate the group's rapid revenue decline. Management has put in place cost-reduction initiatives that could result in US$550m of cost savings for the year, and we expect these to take some pressure off the group's earnings in subsequent quarters. Notwithstanding this, NOL expects operating conditions to remain challenging for the year ahead, and has reiterated its projection of full year losses for FY09, which we had already taken account into our estimates. NOL's revival hinges on the recovery of global trade flows, which remains uncertain at this juncture. We are keeping our estimates and SELL rating unchanged. Our fair value estimate remains at S$0.815.

CapitaLand - Well-poised for new acquisitions

Upgrade to BUY at S$4.22. We continue to like CapitaLand’s (CapLand’s) enviable cash hoard of S$5.2b (post CCT’s rights take-up) and low net gearing of 0.34x. This should pave the way for NAV expansion as it looks for acquisition targets in core markets of Singapore, China and Australia. Despite its 12.9% MoM surge in share price, we believe successful landbank acquisitions could further push up its current share price. Coupled with an improving Singapore residential outlook, maiden income from Orchard Residences and The Seafront should help to mitigate possible landbank provisions for its Farrer Court and Char Yong Garden sites. CapLand trades at 1.23x P/B during the initial phases of property recovery cycles. We thus peg our new target price for the stock at a 20% premium to our new base case RNAV of S$3.52. Upgrade to BUY at S$4.22.

NAV expansion with cash hoard. Among its peers, we reckon CapLand’s substantial cash hoard puts it in pole position to grow NAV when more opportunities for landbank expansion surface in 2H09, especially in China, Singapore and Australia. Concerns over NAV erosion from landbank provisions and revaluation losses would also be effectively solved.

Lure of China. The 17.5% YoY climb in Jan – Apr 09’s sold GFA (to 176.25m sqm) in China provides a genuine indication that buying sentiments have ameliorated. With 2.9m sqm of undeveloped residential landbank remaining, we believe CapLand is well-positioned to benefit from the improved dynamics and strong real estate fundamentals within China’s lower-upper tier cities. Its retail portfolio (28 completed and 10 additional malls in FY09) should also contribute stable income in the event that residential take-up for selected projects fails to take off.

Debt obligations addressed for subsidiaries/associates. Recent successful capital raising and refinancing activities by CapLand’s subsidiaries (Australand: S$350m debt refinanced) and associates (CMT: S$1.2b rights issue, CCT: S$828.3m rights issue and S$160.0m debt refinanced) have removed the need for it to subscribe for more than its pro-rata entitlement. More importantly, this affords it excess cash for acquisition purposes.