This article first appeared in The Edge Financial Daily on July 17, 2017
KUALA LUMPUR: Like a smooth drive up to the hilltop casino in fine weather, the climb in Genting Bhd’s share price has been steady so far this year.
Genting’s share price has gained about 20% since the start of the year — this is considerably good for a stock with a market capitalisation of RM36 billion. It closed at RM9.55 last Friday compared with the recent trough at RM7.45 in mid-November last year.
Still, analysts reckon that Genting's share price could go higher. More than half of analysts surveyed by Bloomberg have “buy” recommendation on the investment holding company that holds a majority stake in two public-listed casino operators, namely Genting Malaysia Bhd (GEM) and Genting Singapore plc (GES). Most of them have pegged target price at above RM11.
In fact, GEM’s share price has fared better than its parent. It climbed to a new record high of RM6.13 in June. Year to date, it has increased 27%. It closed at RM5.74 last Friday. Across the causeway, GES is out of share price doldrum gaining 19.3% at S$1.08 (RM3.38) so far this year, although it is still far from its record high of S$2.17.
Genting owns 49.32% of GEM, and a 52.84% stake in GES.
In a research note dated July 14, AllianceDBS analyst Cheah King Yoong said being the parent company of GEM and GES, Genting offers a cheaper exposure to the two casino operators.
“As the parent company of GES and GEM, which contribute the bulk of the group’s earnings, Genting’s share price is highly dependent on the earnings prospects of these two key subsidiaries,” he said, noting that Genting’s share price performance is highly correlated to share price movements of GES and GEM (correlation coefficient of 0.7) as these two subsidiaries contribute about 80% of Genting’s earnings.
As such, Cheah foresees more buying impetus for Genting in the coming quarters. He opines that the progressive launches of key developments in Genting Integrated Tourism Plan (GITP) and earnings recovery in GES are strong rerating catalysts for Genting.
Maybank Investment Bank Research analyst Samuel Yin Shao Yang concurred that Genting was a cheaper proxy to its two listed units.
“Genting is more than a proxy, especially with regard to GEM, as Genting is also directly exposed to GITP via licensing and management fees that it charges GEM.
“We forecast these fees to burgeon to RM1.1 billion and account for approximately 25% of Genting earnings in 2019,” he said in a note dated July 11.
Yin said Genting does not charge GES licensing and management fees, however, the research house expects Genting’s share price to surge if the latter wins a Japanese integrated resort licence.
On GES’ earnings prospect, AllianceDBS’s Cheah said the sluggish share price performance back in 2015 and early 2016 was partially due to concerns over rising bad debts.
“The stronger earnings recovery by GES is underpinned by cost reduction initiatives and more conservative credit policy,” he explained.
Cheah said 2017 will mark a recovery in earnings following two tough years due to normalising VIP win rate and GES has been more selective and conservative in credit policy over the past year.
On GITP update, Cheah said GEM soft-launched Genting Highlands Premium Outlets in mid-June upon opening of the first and second floors of Sky Casino on March 30.
The group is planning to open the third and fourth floors of Sky Casino, which are for VIP and gold card members in the third quarter of finanial year 2017.
“We expect the number of visitors to improve from 19 million in 2015 to 24 million by 2018, on track to meet its target of 30 million by 2020.
“The increased visitations coupled with the potential availability of 300 new gaming tables are expected to drive its earnings growth,” he said.
According to Cheah, Genting valuation remains attractive when compared with GES and GEM, particularly after the recent price appreciation of these subsidiaries.
Despite more optimistic projection, the key risks include regulatory risks and negative surprises from its key subsidiaries.
Genting is AllianceDBS’s top pick for the gaming sector with a target price of RM11.50.
“With growing investor interest in GES and GEM, we expect the valuation gap between Genting and its intrinsic value to narrow going forward,” he said.