Timely RM3b facelift for Genting Highlands

GENTING Malaysia Bhd's planned RM3 billion facelift for its flagship hilltop casino resort, Genting Highlands, in a bid to double its earnings appears to have placated minority shareholders at its annual general meeting on June 12, who want better returns on their investment.

Just a few weeks earlier, minorities and analysts alike were rudely surprised by a sizeable dent in the company's first-quarter earnings caused by some RM190 million in donations, which were collectively made by Genting Bhd, Genting Malaysia and Genting Plantations Bhd to little-known Yayasan Gemilang 1Malaysia in the run-up to the general election.

"While we're happy to be able to contribute to efforts to eradicate poverty and promote education, arts and sports, we also want better returns. We are old and it is also socially responsible to provide us with higher dividends," one Genting Malaysia shareholder said at the AGM, in response to the company's explanation on the said donation that equalled one-fifth of Genting Bhd's 1Q2013 pre-tax profits, receiving applause from the floor.

"Satisfied or not, what can we do? The money is already given out. We can only hope it benefits the right people," another minority shareholder told The Edge on the sidelines of the AGM.

Whatever the case, analysts say the donations were one-off in nature and welcome Genting Malaysia's plans for a RM3 billion facelift for the hilltop casino resort that currently has some 10,000 rooms spanning five hotels — the first of which opened 42 years ago in May 1971 — and is facing increasing competition from newer casinos in Singapore, Macau and the Philippines.

"Although details are scanty, we view such a move positively," says RHB Research analyst Kong Heng Siong.

"While Genting Highlands is a de facto monopoly, being the country's only licensed casino operator, its annual visitor growth has slowed to low single digits. We believe a RM3 billion facelift will boost [the number of visitors] to the resort as well as spark gamblers' interest [and] propel earnings growth in the long run," Kong wrote in a June 13 note, pointing out that funding is no issue for Genting Malaysia, which he expects to generate annual operating cash flow of RM2.2 billion to RM2.4 billion over the next three years.

Details for the rejuvenation plan are expected to be released in the coming six months, Genting Bhd chairman Tan Sri Lim Kok Thay told The Edge on the sidelines of Genting Malaysia's AGM on June 12.

"The RM3 billion is just a ballpark figure," he said, without providing a timeframe for the planned spending. "Plans are still being finalised … The idea is to double our profits," he replied when asked about details and what Genting Bhd hopes to achieve from the exercise.

"Yes [more rooms, tables] all that and more. There will be more for the family, more shopping," Lim said of plans for Malaysia's sole casino licensee that's located about an hour's drive from Kuala Lumpur city centre. "We do not want to overdevelop [the place] but we still have quite a bit [of land]."

Pointing out that the last major capital expenditure for Genting Highlands was in 2006 when it added the First World Hotel and a convention centre, CIMB Research analyst Lucius Chong says a facelift is "long overdue" and is convinced more table games will be added at the hilltop resort.

"I can't see how they can double earnings without adding more gaming capacity since more than 80% of revenue is from gaming. Rooms and attractions all support the objective of maximising the revenue from the gaming assets," Chong tells The Edge.

"This is definitely a catalyst. In the gaming industry, there's constant need to revitalise one's offering and the group is running at about 96% occupancy on 10,000 rooms, so its growth was capped," he explains.

While Genting Singapore plc rakes in more revenue and earnings, aided by the strength of the Singapore dollar, plans to double earnings at Genting Malaysia — which still contributes over 45% of Genting Bhd's net profits — are significant. Genting Bhd also currently enjoys better margins from its Malaysian cash cow compared with its operations in the UK and the US.

Analysts at HwangDBS Research also view the facelift positively. "Major capex for Resorts World Genting is long overdue as the tired properties face rising competition from newer integrated resorts in Singapore, Macau and Manila. Genting Malaysia has been talking about adding 700 rooms to First World Hotel (+7% capacity) by 2015.

"Whether Genting Malaysia will be able to double profit and over how long a period, would depend very much on how much gaming space can be added in view of Malaysia's more hawkish stance on the gaming sector (gambling is prohibited under Islam)," HwangDBS said in a June 13 note, retaining a "hold" recommendation and RM4.05 target price for Genting Malaysia.

While the planned RM3 billion spending is sizeable, analysts say it is backed by Genting Malaysia's RM2.1 billion net cash position and strong operating cash flows of about RM2 billion a year.

"Capital expenditure for New York (if Genting Malaysia wins any bid for the potential three casinos upstate) and Miami will likely be later rather than sooner, pending regulatory changes — which are expected at end-2013 and end-2014 respectively at the earliest," HwangDBS said.

Genting Malaysia made just over RM1.4 billion in net profits in 2012, down 1.8% from RM1.43 billion in 2011 on higher impairment losses, and a 7.1% year-on-year decline in revenue to RM7.89 billion.

At the time of writing, there were 16 "buy" recommendations on Genting Malaysia versus seven "holds" and one "sell", with price targets ranging between Goldman Sachs' RM3.18 and Macquarie Research's RM4.75.

Analysts were also broadly bullish on Genting Bhd, with 10 "buy" recommendations versus nine "hold" and three "sells", and price targets of between RM8.10 and RM13.71 apiece, Bloomberg data shows.

Genting Malaysia closed at RM3.82 on June 13, while Genting Bhd ended at RM10.34, up 12.4% this year.

This story first appeared in The Edge weekly edition of June 17-23, 2013.

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