INDUSTRY talk is rife that the cost of the Genting Integrated Tourism Plan (GITP), which is being undertaken by Genting Malaysia Bhd, will likely escalate past the budgeted RM5 billion.
Recent news of Genting Malaysia (fundamental: 2.40; valuation: 0.80) raising RM2.4 billion from the bond market has added fuel to the speculation.
Citing sources, digitaledge Daily reported on Aug 13 that Genting Malaysia was raising RM2.4 billion from the fixed income market. The book building exercise closed last week.
“Genting Malaysia is raising funds for working capital purposes as well as for its integrated theme park project that is slated to open by the end of next year,” a source told digitaledge Daily.
Another source said the fundraising exercise involved two tranches. “One tranche is for RM1.3 billion — 10 years at a coupon rate of 4.9%. The other is for RM1.1 billion — five years at a coupon rate of 4.5%.”
It is understood that the notes were issued by Genting Malaysia’s wholly-owned subsidiary GENM Capital Bhd.
This is not the first time this year that Genting Malaysia has undertaken an exercise to raise money, citing funding for GITP as one of the reasons.
In May, the group announced that its indirect unit, Resorts World Ltd, had proposed to sell its entire 17.81% stake in Genting Hong Kong Ltd for at least RM1.69 billion cash or 33 US cents per share. Genting Malaysia’s original cost of investment for the shares was US$604.1 million, representing an average purchase price of 42 US cents apiece. The investment was made between 1998 and 2006.
Genting Malaysia had said no buyers had been identified at that stage, and the proceeds arising from the disposal may be used to partially fund GITP. There have been no updates on this since then.
“There is a view that GITP will cost more than the original RM5 billion planned due to cost overruns. Indeed, the price of everything, from raw materials to services, has gone up from the time the project was announced,” says an analyst with a local bank that covers the stock.
That GITP needs a bigger budget than RM5 billion is not a surprise, says an analyst with a foreign research house. “After all, part of the cost of the project is in US dollars, especially the theme park. Given how bad the ringgit has depreciated, it will definitely increase the cost.
“Take, for example, the Universal Studios project in Singapore. Some of the raw materials for the theme park had to be ordered from the US. They say it is for QC (quality control). So, that could also be the case for the [Twentieth Century] Fox theme park at GITP … they could have their own requirements and QC procedures to follow.”
However, he points out that a higher cost should not be a major concern, as the highland casino resort is a cash cow that is able generate RM2 billion to RM3 billion a year.
An industry source says the cost of GITP could also have surpassed the budgeted amount due to additions and changes to the original plan.
RAM Ratings, in a July credit rating rationale report, says, “Originally budgeted at about RM5 billion, we understand that capex (capital expenditure) for GITP is likely to rise following the continuous fine-tuning of the overall master plan (including higher costs due to the weaker ringgit).
“We opine that Genting Malaysia’s strong financial profile provides it with a buffer against significant increases in costs for GITP. Nonetheless, we may need to reassess the impact on the group’s credit profile if the capex is substantially higher than expected.”
In end-2013, the locally listed gaming group announced that GITP — a 10-year master plan for the development, expansion, enhancement and refurbishment of hotels, theme parks and infrastructure at Resorts World Genting — was expected to cost the group RM5 billion.
At the time, the ringgit was trading at 3.27 to the US dollar, compared with more than 4.00 currently.
Interestingly, Genting Malaysia chairman and CEO Tan Sri Lim Kok Thay had not discounted the possibility of surpassing the RM5 billion figure.
“We may end up spending more. The theme park alone will exceed our budget once again, and I don’t think we’ll stop at RM1 billion,” he told a press conference after the launch of the Twentieth Century Fox World theme park and GITP in December 2013.
“We’ve no idea of the size and the type of park, since it’s the first of its kind. It’s no surprise that the amount has grown to RM1 billion and it may change again.”
From the initial budget of RM3 billion, Genting Malaysia had increased its investment in the facelift of its flagship hilltop resort by as much as 67% to RM5 billion at the end of 2013.
Strong cash flow
RAM Ratings says in a July press release that Genting Malaysia’s cash-flow generating ability remains strong, underpinned by its gaming business.
“The group’s operating cash flow has generally stayed above RM1.5 billion in the past five years. For [the] financial year ended Dec 31, 2014 (FY2014), its funds from operations (FFO) debt coverage remained solid at 0.92 times (FY2013: 1.04 times). However, its free operating cash flow (FOCF) dipped into deficit, given major capital expenditure incurred mostly for GITP,” it says.
The local ratings agency also notes in its ratings rationale that due to increased debt to fund its capex, its adjusted FFO debt cover is anticipated to weaken to below 0.5 times this year, although it will remain robust.
“The group’s FOCF will likely remain in deficit for the next two years due to the sizeable capex. Its coverage metrics could change abruptly in the event that it takes on substantial debt to fund aggressive expansion,” it says.
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This article first appeared in digitaledgeWeekly, on August 17 - 23, 2015.