This article first appeared in The Edge Financial Daily, on November 16, 2015.

Genting Bhd
(Nov 13, RM7.33)
Maintain outperform with a higher target price (TP) of RM9.30: Genting Singapore, a 52.7% subsidiary of Genting Bhd, reported a 29% decline in third quarter financial year 2015 (3QFY15) core net profit due to lower business volume in the premium segment and higher bad debt provisioning.

Genting Singapore continued to report fair value loss on derivative instruments albeit lower compared to 2Q15 (S$61.4 million [RM189 million] versus S$95 million). For the coming quarters, fair value losses are expected to be less prominent. On a quarter-on-quarter basis, Genting Singapore reversed from a reported net loss in 2Q15 to a profit of S$37.2 million. For the nine-month FY15 (9MFY15), core net profit of S$275 million was slightly above consensus forecast, accounting for 77% of full-year estimate.

For FY15 to FY16 forecast, we estimate Genting Singapore to contribute to about 40% of the group’s earnings. We revised up our TP after factoring in a higher crude palm oil (CPO) price assumption for Genting Plantations Bhd.

For 3Q15, non-gaming revenue rose 10% year-on-year (y-o-y) as the introduction of new attractions has led to a strong increase in daily average visitation by 17% y-o-y. Meanwhile, the rate of decline in gaming revenue has slowed down to 5% y-o-y compared with over 25% in the previous quarters. We attribute this to a more favourable win percentage and stronger mass gaming business.

Owing to a more conservative approach to collections, bad debt provisioning has increased to S$92.5 million (S$56.6 million in 2Q15). We understand that this has yet to bottom out, and impairment loss on receivables could increase further over the next one to two quarters. Given the rate of its bad debt provisioning, Genting Singapore is likely to achieve a stronger and cleaner balance sheet towards second half of 2016. Going forward, the company would continue to focus on the premium mass and mass business while the VIP business would be scaled down significantly as it right-sized its credit extension to VIP premium customers.

Our FY16 to FY17 earnings forecasts have been revised upward by 2% to 7% mainly due to the upward revision in our CPO price assumption. As a result, our sum-of-parts-based TP is revised. Since our upgrade in August 2015, the share price has risen by about 12%. However, given a further upside potential of 25% to our TP, we retain our “outperform” rating on Genting Bhd. We believe the catalyst for Genting Bhd would be higher contribution from its plantation arm and a gradual recovery of business volume for its integrated resort operations.— PublicInvest Research, Nov 13