Genting Stock Review: More Pain Ahead
Updated: Aug 27, 2020
Genting Singapore (SGX: G13) is the Integrated Resort (IR) operator of Resort World Sentosa (RWS). The resort is comprised of a casino, 4 hotels and multiple attractions such as Universal Studios Singapore (USS), S.E.A Aquarium and Adventure Cove Water Park.
I believe it should be common knowledge by now that tourism was severely hard hit by this pandemic. Tourism oriented businesses were forced to cease operations and not many will be able to sustain without any source of revenue for months.
Since Genting Singapore is driven by tourism... I think you can see what I'm getting at but how bad is bad?
Share price of Genting Singapore has fallen by over 60% within 10 years. Genting currently has a PE ratio of 13.57 with a dividend yield of 5.26%.
For the past 10 years, revenue has slowly been declining due to the gaming segment which has been also trending downwards as well. Performance for this year will be exceptionally bad, given that Q1 2020 had already recorded 36% drop in revenue. I assume Q2 will be essentially zero after all Genting is a non-essential business.
Despite so, the business was able to generate significant amount of positive free cash during challenging economy conditions in 2015 onwards.
The management was pessimistic on the outlook of 2020 and estimated recovery to only happen earliest mid 2021. For now, there is nothing Genting can do except to wait it out and hope for a proven vaccine or cure is available soon.
Gaming constitutes the largest portion of revenue, followed by attractions and hotel.
As mentioned earlier, gaming revenue has been declining annually which management has attributed it as economic slowdown in the region. Well, casinos are susceptible to economic conditions. If people don't feel secure about their jobs or fear losing income, gambling should be the last thing in mind.
Genting has a strong balance sheet with current ratio at 5.88 and D/E ratio at 0.03 while sitting on approximately $4 billion cash. Initially, Genting intended to utilize their cash reserve to fund the upcoming expansion but the priority has now changed to keeping the business afloat.
Unfortunately, the longer this pandemic drags on, the worse it becomes for Genting. Not sure whether Genting is still able to fund the $4.5 billion expansion and pursue the USD $10 billion cap Yokohama IR project at the same time with reduced cash. They probably will have to take on significant amount of borrowings.
Revenue growth drivers
Revitalization and expansion of RWS
RWS will expand their premises by 164,400 sqm which is about 50% of their current Gross Floor Area (GFA) and another 500 sqm to their casino area. Estimated completion date was 2025 but it will be delayed due to coronavirus. Details of the renewal plans can be found here. According to the FifthPerson's article here, bigger emphasis had been placed on attractions because the management observed a global slowdown in gambling.
Although reasons were unspecified, quick googling led me to a study by UK Gambling Commission here may shed some light. In summary, more gamblers engaged in other activities instead of gambling whereas the remaining sought after online gambling platforms.
Another drawback is the increased casino tax rate that will be implemented starting from 2022 and will be fixed for 10 years before reviewing again.
Premium gaming tax: 5% to 8% for first $2.4 billion and 12% for excess
Mass gaming tax: 15% to 18% for first $3.1 billion and 22% for excess
Tax rate will also be subjected to further increase if Genting fails to fulfill their commitments to expand attraction. For details, please see here.
Some background info, Japan legalized casinos in 2018 and planned to issue three IR licenses in locations: Osaka, Yokohama and Tokyo. Genting originally expressed interest in the first two IR but subsequently withdrew from Osaka bid "after considering shareholders' opinion".
Wanting to understand more, I came across this article here. It appears that Japan government intends for Osaka IR to be operational by 2025, in line with World Expo 2025. However, considering that proposal closing date is July 2021, it becomes extremely challenging for IR operator to complete such a huge project which typically requires 4 - 5 years.
Anyway, this will be a huge boost to the top line if Genting were to be awarded with Yokohama IR project given that Japan's entire casino market is projected to be worth $15 billion. The management seemed rather confident about this deal as Japan had expressed interest to replicate Singapore's IR model.
It was unfortunate that this pandemic arrived at an unprecedented time which derailed many of Genting's plans. Nevertheless, I do believe tourism would recover when a vaccine/cure is available.
Overall, Genting Singapore could have been a fairly stable business that generates a lot of cash if it wasn't for COVID-19. They have a sound mid to long term plan to fuel growth which might be suitable for investors with lower risk profile. Since RWS is one of Singapore's key attractions, investing in Genting is akin to having exposure to Singapore's tourism sector which accounts for 4.1% of GDP.
For anyone interested, do expect a lower valuation in the later part of this year and be prepared to hold for a few years before it can realize its value.
The Genting stock in my portfolio actually belongs to my mum which I helped her to buy through DBS Vickers. My mum had been a long time investor of Genting, way back when it was $0.30+ per share out of an advice from my tuition teacher. It was actually a good advice, after all the stock went 7X in 2011. Well if she had sold during its peak, I think there would be more delicious food on the table.
Disclaimer: The information listed here is strictly my personal opinion. It should not be regarded as investment advice. Please do your own due diligence.
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