Genting - Results preview: A lacklustre 2009; look to 2010 and beyond

Ggaming analyst ..... Lim Soo Hek


Genting (GENT MK) Buy
Price/Tgt: RM6.05/7.60 Mkt Cap: US$6.34b Daily: Vol 6.25m 1-Yr Hi/Lo: RM6.80/3.08

Results preview: A lacklustre 2009; look to 2010 and beyond

We expect 2Q09 results to be dragged down by the leisure and plantation unit due to lower CPO production and prices. Going forward, 2010 and 2011 earnings are likely to be boosted by RWS. BUY. Target price: RM7.60.


Results Preview
We expect Genting's 2Q09 results, due by end-Aug 09, to be flat qoq but substantially lower yoy, mainly dragged down by its leisure and plantation divisions. We expect the leisure division's core earnings to decline 10-15% yoy but to remain flat qoq, mainly due to lower visitor arrivals amid the H1N1 pandemic, while plantation earnings should fall 67% yoy but
be marginally higher qoq (+2%) due to lower CPO production and prices. The power division will improve as regional economies recover gradually. The maiden cash flow contribution from the Tangguh liquefied natural gas (LNG) plant in Indonesia will be delayed further to 1Q10 and Resorts World Sentosa's (RWS) pre-opening expenses are expected to accelerate in 2H09.


Stock Impact

A lacklustre 2009? We do not foresee any excitement for 2009, mainly due to RWS' pre-opening expenses, adverse operating conditions in the UK, and the effect of the economic crisis on visitor arrivals and spending, which was further compounded by the H1N1 pandemic. We estimate RWS will incur S$200m in pre-opening expenses, mostly to be recognised in 2H09 mainly on recruitment (10,000 staff), training, sales and marketing programmes prior
to RWS' opening in 1Q10.

? so look to 2010 and beyond. We expect Genting's earnings growth to gain momentum in 2010 and 2011, boosted by RWS' contributions. We forecast Genting's 2010 and 2011 EBIT growth at 80% and 17% yoy, mainly as RWS' contribution to group EBIT rises to 32.9% and 37.5% respectively (reversing losses in 2009).

Earnings Revision

We have raised our 2010 and 2011 earnings forecasts by 18% and 19% respectively, as RWS will enable 54.4%-owned Genting Singapore (GENS) to book net earnings of S$295m and S$444m in 2010-11. However, we have lowered our 2009 earnings estimate for Genting by 10.3%, taking into account lower average selling prices (ASP) and production at its plantation unit, as well as an increase in RWS' pre-opening costs to S$200m.


Valuation/Recommendation

Raising target price to upcycle valuations. We have raised our target price to RM7.60, after imputing GENS' target price of S$0.95 (based on cost of equity of 9.2% and zero terminal growth after RWS' concession period) into Genting's RNAV valuation while lowering its holding company discount to 10% from 20% previously.

At RM7.60, it would trade at 16.0x and 5.6x 2010 PE and EV/EBITDA respectively, vs global peers' average of 40.2x and 12.7x. Key re-rating catalysts for this stock: issuance of casino licence by the Singapore government, an earlier-than-expected opening of RWS (instead of in 1Q10), a further delay in Marina Bay Sands' opening, and a better regional economic outlook, which would drive Singapore's tourist arrivals.


Prefer Genting to GENM. We prefer Genting over Genting Malaysia (GENM/Target: RM3.26) for the former's exposure to RWS' earning growth potential, as well as other potential catalysts such as disposal of its power plant. We recommend buying into share price weakness as Genting will be the cheaper entry point to RWS' future earning growth potential.