The Return of Genting

OSK Investment Bank recommends Genting for your portfolio.

Why? Because at its current price of RM7.40, it is a steal.

Based on an estimated forward earnings of 41.7 sen per share and Thursday’s closing price (30 Aug 2007) of RM7.35, the stock is trading at a price-to-earnings (PE) of 17.6 times.

This PE is relatively undemanding when bench-marked against its global casino peer's PE average of 26 times to 28 times considering the group’s fast expanding global casino footprints and efforts to unlock the value of its non-core assets.

OSK expects the group's oil and gas (O&G) business grow exponentially by fiscal year ending Dec 31, 2010 (FY2010).

Following an analyst briefing by the group, OSK noted that there were promising on-going developments on Genting’s three Indonesian oil fields - Anambas, North West Natuna and West Salawati - that were currently in exploration stage.

Furthermore, 95% owned Genting Oil and Gas Ltd was anticipated to see cash flow generated from the Indonesian Muturi production sharing contract in late 2008.

When the unit sold its 45% stake in Muturi to BP Global Investments Ltd in 2001, it retained long-term rights to a deferred share of future pre-tax monthly income from the production-sharing contract.

OSK believes that the contribution from the O&G division could potentially rise by more than five folds by FY2009/2010. Genting Oil and Gas derives income from the Zhuanxi oil field in China and is currently contributing less than 2% of the group’s pre-tax profit.

Genting’s power division, on the other hand, was “deeply undervalued” given that it is the second largest earnings contributor, making up 22% of EBITDA.

Genting’s current share price only accounted the value of its gaming business; hence investors buying into Genting were getting its power assets virtually for free, adding that the power assets were estimated at RM1.22 per share.

Furthermore, given the steady cash-flow, the group is unlikely to dispose entirely its power assets.

“Instead a potential listing of its power assets may be a more viable option to unleash its hidden value,” OSK said.

Meanwhile, some might perceive Resorts World Bhd, the group’s leisure and hospitality unit, to see subdued domestic future earnings growth due to regional competition and a matured domestic “day-tripper” market segment.

However, Resorts’ first half-year double-digit growth in revenue and earnings proved that the management was successful in its strategies to drive both patronage growth and yield enhancement.

This included introducing higher level of non-casino entertainment activities such as concerts, casino renovations and cheaper hotel room packages, membership programme to drive VIP revenue and targeting higher yielding overseas customers like Middle Eastern tourists.

Resorts’ handsome cash flow, estimated at RM3.4bil by end of FY07, should come in handy when acquisition opportunities arise.

OSK noted that the management indicated that Resorts should not be confined solely to its domestic operations and Genting group would mobilise excess resources to help spearhead its global and regional casino growth aspirations.

The brokerage expects more opportunities to come as many casino and non-casino companies that took up excessive leverage during the ultra low interest rate environment four to six years ago to buy major casinos may now be under pressure to de-leverage given the higher rates.

This is especially so for casino property acquisitions by non-casino companies, which may be plagued with rising interest costs and highly leveragedunder managed casino properties.

Resorts with its cash rich balance sheet and the robust free cash flow generation is well positioned to capitalise on such opportunities.

A best scenario perspective for both Genting and Resorts. Believe half of it and you are in the money.

By the next 6 to 12 months, you will see Genting and Resorts back on their feet leading the Bursa.

Heartsong