This article first appeared in The Edge Financial Daily, on May 17, 2016.

Genting Bhd
(May 16, RM8.56)
Maintain hold with an unchanged target price (TP) of RM8.40: Genting Singapore plc’s first quarter ended March 31, 2016 (1QFY16) results were below our and consensus expectations, with core net profit of S$65.7 million (RM193 million) [-1.3% year-on-year (y-o-y)] accounting for 16% and 17% of the full-year estimates respectively. The key variance was a negative surprise in higher bad debt provisions, which rose 21% y-o-y to S$92.4 million in 1QFY16.

The management had expected bad debt provisions to taper off in 2016 (2015: S$270 million), but now it appears more likely to remain elevated following the tightening of its credit policy from 90 days to 30 days. The impact of the tighter credit policy would be felt in 3QFY16.

Genting Singapore’s gaming revenue grew 20.5% driven by quarter-on-quarter (q-o-q) growth in VIP and mass volume. In addition, its rolling win percentage improved to 2.9% (4QFY15: 2.1%) in 1QFY16 (that is above the long-term average of 2.85%). Despite the sequential growth in VIP volume, the management expects the VIP segment to still remain challenging and thus would continue its focus on growing the mass market.

Genting Singapore improved its volume market share in the VIP market eight percentage points q-o-q to 46% in 1QFY16, while its volume market share in the mass market was relatively stable at 41%.

According to the management, it has begun selling residential properties from Resorts World Jeju (RWJ) since April 2016, and noted that the take-up has been encouraging although no figures were disclosed. Besides that, the management expects RWJ to cost US$2 billion (RM8.1 billion) [lower than initial estimate of US$2.2 billion] following some savings to be derived from building costs.

Pending Genting Bhd’s results later this month, we have kept our earnings forecasts and sum-of-parts-based TP of RM8.40 on Genting unchanged. While Genting’s domestic gaming operations will continue to underpin earnings, we believe the group’s earnings growth momentum would depend on the speed of recovery in consumer sentiment and commodity prices. Prolonged weakness in Genting Singapore’s VIP segment and elevated bad debts may continue to be a drag on Genting’s earnings. — Affin Hwang Capital, May 16