Genting Bhd
(Aug 13, RM8.88)

Maintain outperform with lower target price of RM11 from RM12.30: The potential sale of Genting Sanyen Power Sdn Bhd for RM3 billion to RM3.5 billion, as reported last Friday by a local newspaper, presents an attractive opportunity for Genting to exit its Malaysian power business.

The price tag is at a 32% to 54% premium to the replacement cost for a similar power plant.

Genting’s earnings forecasts for the financial year ending Dec 31, 2012 (FY12) to FY 14 are cut by 2% to 13% after we lower Genting Singapore’s numbers by 20% to 24%.

Following a cut in Genting Singapore’s target price by 18%, Genting’s target price is lowered by 10.5% based on a continued 10% discount to revalued net asset value (RNAV). Our “outperform” call is maintained.

Non-core asset disposals are a positive catalyst for the share price. Last Friday, media reports said 1Malaysia Development Bhd (1MDB) is planning to buy Genting Sanyen from Genting Bhd for between RM3 billion and RM3.5 billion.

Genting Bhd’s 73%-owned Genting Sanyen owns the Genting Sanyen Kuala Langat power station, a 720MW gas-fired combined-cycle power plant in Selangor.

Considering the uncertainty of a renewal of the plant’s power purchase agreement (PPA) upon its expiry in 2015, and the pressure on returns in future Malaysian PPAs, the news of its disposal is not entirely surprising.

The potential acquisition price of RM3 billion to RM3.5 billion translates to US$1.3 million (RM4.06 million) to US$1.5 million per MW, which is a 32% to 54% premium to the estimated replacement cost for a combined-cycle power plant.

The disposal would lower Genting’s FY13 net profit by almost 7% but exiting the Malaysian power business removes a future overhang and, if the reported numbers are accurate, done at a good price.

It does look like the group still wants to keep its international assets. It recently clinched a 660MW PPA in Indonesia to complement its India and China interests.

The potential divestment is a reaffirmation of Genting’s direction, becoming a purer global gaming entity, or a conglomerate that is more appreciative of sustaining its level of returns rather than getting bogged down in businesses that are increasingly marginalised. This report, if confirmed, would be cause for a re-rating of the group. — CIMB IB Research, Aug 13

This article appeared in The Edge Financial Daily on 14 August, 2012.