Saturday, September 12, 2009

Genting - HOLD by OCBC (10 Sep 09)

OCBC has given a HOLD call on Genting International

Proposes 5 for 1 Rights Issue.

S$1.63b rights issue. Genting Singapore (Genting) has proposed a renounceable 1-for-5 rights issue at S$0.80 each to raise S$1.63b. According to management, the issue is undertaken to pro-actively strengthen its balance sheet, enhance its financial flexibility and competitive position, and facilitate future business expansion. Based on the last traded price of S$1.19, the rights discount is about 33%; it is also at a 29% discount to the theoretical ex-rights price of S$1.125. Genting also said it intends to use 60% of the net proceeds for funding of future acquisitions/ investments, or JVs/strategic collaborations, and 40% for working capital (which includes repayment of bank borrowings).

Why now? Given the recent run-up in its share price, we believe it may be an opportune time to raise some cash from the market to add to its kitty. While there have been some concerns about the cost over-runs at RWS (Resorts World @ Sentosa) as well as its payment of its syndicated loan obligations of S$4b in 2011 and its S$450m convertible bonds (CB) in 2012, we think that these concerns may be overwrought. Instead, we see the move as more of a insurance, should there be any hiccups in the global financial system again. Genting has also previously said that it will fund the extra S$590m of over-runs with its internal operating cashflows once the casino opens its door; we do not see any issues with this as we understand that some of its attractions would only be completed in 2011/ 2012.

Potential acquisitions and strategic collaborations. Going forward, industry watchers expect the Asian gaming market to be the most promising - growing at 15.7% CAGR for the next five years1. As such, we believe that Genting would focus on making acquisitions or forming JVs in this region. We note that possible targets could be in the Philippines (Subic Bay), Macau (not related to Stanley Ho), or even potential new markets such as Japan and Taiwan where Genting can step in to provide the technical expertise.

Adjusting our fair value to S$1.05. In view of the possibility of RWS opening before end 2009 and also the more upbeat regional economic outlook, we have further refined our estimates, raising our FY10 revenue by 11.4% and reducing our loss forecast by 66.7%. We have also bumped up our fair value from S$0.85 to S$1.05 (S$1.01 adjusted). But given the limited upside, we maintain our HOLD rating.

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