Japan beckons while RWS is set for a strong earnings recovery
Resorts World Sentosa (RWS) earnings have bottomed out in 2013 and we believe will stage a strong recovery in 4Q13 and 1Q14. Meanwhile Genting Singapore has positioned itself ahead of its peers in potentially capitalising on integrated resort (IR) opportunities in Japan.
No change to our EPS forecasts and RNAV-based target price. Key catalysts will come from upcoming results and positive newsflow from Japan. Under our new rating structure our call changes from Outperform to Add.
VIP to drive recovery
On closer analysis of core earnings over the last few quarters, GENS's 3Q13 performance was actually suppressed by additional provisioning and backdated charges at the EBITDA level. Adjusting for this, core earnings have actually recovered to 1Q12 levels. The VIP business is the driver for this recovery and this segment seems to be broadening. Despite the structural issues of credit and outstanding receivables, VIP debt collection has been healthier, exceeding S$400m over the last three quarters which again represents a recovery to 1Q12 levels. We therefore believe that 4Q13 and 1Q14 are poised to surprise on the upside after bottoming out in FY12 and FY13.
Big in Japan
Newsflow from Japan is expected to become incrementally positive in 2014, with the Diet possibly legalising casino gambling in 1Q14. Although it is still early days, the potential impact of securing a US$$10bn integrated resort (IR) project in Tokyo or Osaka is too large to ignore. GENS is seen to be on the front foot, having invested a large amount of time putting boots on the ground and with S$4.3bn of unencumbered cash sitting on its balance sheet.
Option value for free
With the re-rating of RWS business now pegged at S$1.60 per share in GENS’s RNAV, the option value in Japan is a further potential kicker to the share price. We currently estimate the NPV of a 50% stake in US$10bn Japan IR project to be worth S$0.37 per share based on a ROCE of 15%. Applying a 50% probability to this we come up with an option value of S$0.18 per share and a RNAV target price of S$1.78.
Publish date: 02/12/13