Value in balance sheet
▊ GENS’s 4Q13 core net profit was only half of our estimate, resulting in FY13 core EPS coming in 15% below our expectation. The S$90m shortfall in 4Q13 core net profit can be explained by: 1) the below-average win rate of 2.5% (S$62m hit on bottomline), and 2) the S$28m additional provisioning for the ageing of receivables. Adjusting for these two factors, it appears that our view that GENS’s earnings are bottoming out and turning the corner is materialising. We cut our FY14-15 EPS by 10% and RNAV-based target price to conservatively assume that the additional provisioning for the ageing of receivables will continue indefinitely. Maintain Add. GENS has started to use its excess capital with the Jeju Island JV. More deals will be key catalysts.
4Q13 hit by provisioning
The impairment of trade receivables in 4Q13 amounted to $57.5m, higher than the usual run rate of S$30m per quarter due to the conservative accounting policy of writing off 100% of receivables that are more than 365 days old. The receivables usually translate into future business as they are used to partly offset the rebates offered to VIPs. However, we have conservatively assumed that the high provisioning will continue and will not be recoverable. Cash conversion of VIP debt remained a healthy S$349m in 4Q13, up 44% yoy.
Underlying VIP trend positive
Resorts World Sentosa (RWS) ended FY13 with 51.2% market share of VIP rolling chip, compared with 49.5% at end-FY12. 4Q13 was the second consecutive quarter that RWS’s VIP rolling chip was higher than Marina Bay Sands’ (MBS) by a considerable margin (15% higher in 4Q13 and 20% in 3Q13). We believe that RWS has successfully added depth to its VIP business, while MBS is focused on expanding the premium mass segment.
Balance sheet is the key catalyst
GENS has S$2.3bn in perpetual capital securities on its balance sheet that costs 5.1% or S$118m p.a. The company has a total of S$3.6bn in cash and generates an average S$1bn p.a. in free cashflow. The US$2.2bn JV on Jeju Island will require an estimated US$400m in capital. We are not surprised that management is looking at more opportunities beyond Japan to expand low ROEs.
Publish date: 21/02/14