Genting's share price has reached great value levels. In fact, the valuation is as if they did not get Sentosa IR project, thats the kind of valuation Genting is at now. There are a few things which may be bugging the stock price:
a) Cost overruns at Genting International's RWSentosa IR project
b) Strong likelihood of being whacked with a rise in casino tax in the upcoming Budget
c) A sharp slowdown in share buybacks at Resorts and Genting which may be taken to mean there are issues just beneath the surface
Genting International, the Singapore-listed subsidiary of Malaysian gaming giant Genting Berhad, has invested a fresh S$400 million to beef up the capital of unit Resorts World at Sentosa Pte. Ltd. (RWS), which is developing a S$6-billion integrated resort and casino - this happened two months back. Genting International said it, through unit Star Eagle Holdings Ltd., has subscribed to an additional 400 million new RWS shares, raising its investments in RWS to S$1.5 billion. The investment was funded from the proceeds of Genting International's S$2.2 billion rights issue in August last year. RWS is building one of two integrated resorts in Singapore. The company also announced that the 49-hectare Sentosa resort, slated to open in 2010, will house a S$340-million Hard Rock hotel that will be built by construction firm Low Keng Huat (Singapore) Ltd.
Getting To The Pulse
a) There seems to be a deliberate strategy to be a pure gaming company. First on the
chopping block will be Genting Sanyen IPP which should net RM3.6bn. The focus on
gaming will bring about better valuation and would be seen in a positive light by
institutional investors.
b) Even Asiatic may be up for sale soon. Asiatic may fetch RM3.3bn.
Just cashing out of these two major assets will bring the share price much closer
to its RNAV of RM9.30. Even if Genting or Resorts World were to be asked to
subscribe to new shares in RWSentosa (to beef up spending and capital), it will
still be fairly arm's length and same concentric sector investment. Currently
Genting owns 54% of Genting International.Any further fund injection could be
done by Genting subscribing to new shares in RWSentosa.
Its very obvious institutional investors are scared of the cost overruns at
Sentosa. Its a S$6bn project and judging from developments over the last 2 years,
it is likely that you can lump another S$1.2bn at least to the overall
construction cost. That would severely affect payback calculations. Still, i
think the discounting had been a tad overdone already, unless the real overrun
figure is above S$1.8bn, then the stock should trade lower. I doubt very much.
Genting should also make known to all how their cost and budgeting have been. You
should not and cannot keep such information away from investors and expect them to
buy on faith alone, its not a religion. The sooner Genting's management come out
with a clear estimate of cost overruns and how they will source for additional
capital, the sooner will the stock move to fairer valuation. Right now, its
grossly oversold.
The stock is now even trading close to the lowest 10% of its average PER band.
Obviously pink elephant in the room which many are not saying is the huge cost
overruns in Sentosa and that will affect payback calculations, but it appears that
the worse case scenario has been discounted already.
As for the Budget tax, every 1% hike will hit Resorts World's net profit about
2.2% while it will only knock 1% off Genting's net profit. Great value to pick up
below RM6.00, but will have to ride out the pessimism surrounding local bourse.
Stock should perk up after Budget day and on the actual sale of Genting Sanyen.
p/s photo: Vivian Hsu
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