Headwinds still strong for Genting Singapore

Genting Singapore, whose 2015 profit plunged by 70 percent to S$193.1 million ($138 million), is expected to suffer more pain ahead as it struggles to reposition the brand and recover from prior lending policies.  

Singapore’s two casinos have both been at pains to find catalysts for growth, with the highly regulated market offering little room for further expansion. However, Resorts World Sentosa appears to be slipping further behind its rival Marina Bay Sands. 

In December, Fitch Ratings analysts stated that the market share for Marina Bay Sands is now at about 62 percent with Genting’s Resorts World Sentosa slipping back to 38 percent.

For Q4, net profit was just S$22 million, compared with S$118.0 in the comparable period. While some analysts are still recommending a buy or hold/neutral on the shares, others, such as Deutsche Bank, have recently reiterated a sell and “see more pain ahead.”

We looked into the issues behind the lower revenue and income, analyzed the numbers, and provided our own viewpoint.

The company attributed the drop in revenue to a decrease from the VIP gaming market and a tightening of the firm’s credit policies. The company had been aggressive in providing credit to high rollers, primarily from China, who have been sluggish in paying back their debts. With a tightening of credit, the company says it expects losses to improve.

The company has increased a provision for doubtful debts to $45.3 million for Q4 and $270.7 million for the 2015 year up from $262 million in 2014 or 3.05 percent.

However, the property also lacks other key elements in its business model that benefit its rival.

Resorts World Sentosa has the Universal Studios, Waterpark, Dolphin Island and Galleria Luxury Fashion along with notable restaurants, which are popular tourist draws. The group reported 7 million visitors to its attractions in 2015.

Unfortunately, it lags behind the Marina Bay Sands in terms of catering to conference and convention guests. Granted, there are facilities for business travelers at Resorts World such as the Hard Rock Hotel, but not to the extent that has been developed and applied at Marina Bay Sands.

Marina Bay Sands has not only stressed sustainable ways and “green meetings” but has received positive feedback from business leaders worldwide, including Richard Branson. Its focus on exhibitions, a museum, diverse restaurants for all budgets, and varied entertainment allows them to obtain market share where there is limited competition.

They have easily eclipsed Resorts World by focusing on the non VIP gambler and have looked at the gambling aspect as an ancillary revenue stream. It should be noted that Resorts World Sentosa has decided to focus more on the masses going forward, with the addition of the 550 hotel rooms at Genting Hotel Jurong. One of the major factors according to msn.com and the bank CIMB is the location and the fact that Genting has no other VIP markets to depend upon, either internally or via a partnership.

Overall the key for the success of Marina Bay Sands is the diversification of its properties and facilities that creates demand from both the mass market and VIP sector.

In terms of revenue numbers, Q4 earnings at Marina Bay Sands were also down about 35 percent to a net profit of US$338.2 million on revenue of US$703.9 million. Yet, thanks to foreign currency fluctuations and a property tax refund, the resort’s EBITDA rose 11.8 percent. Sheldon Adelson, the Chairman and CEO of Marina Bay Sands, recently stated that over 80 percent of the operating profit in both Macau and Singapore is derived from mass gaming and non-gaming segments. He also stressed that less than 20 percent of the profit is coming from VIP gaming.

So what is the prognosis for Resorts World? While the overall group does sit with $5.85 billion in current assets, the majority (85.5 percent) of this is cash as opposed to $6.30 billion in 2014 when only 58.64 percent was cash. With interest rates near zero it is important for the firm to put such a substantial amount of cash to work internally. Unfortunately, there is only so much the firm can do at the present time in Singapore to increase market share. The firm will have to utilize this cash as a reserve if market conditions and deteriorating revenues continue into 2017.

We decided to do a further analysis of the condition of the group going forward. While the analysis is proven for other businesses, primarily manufacturing, we realize the overall nature of the casino industry can be quite different. The Z-Score was created many years ago by this writer’s professor at NYU Stern. It is quite simple but quite revealing for companies that are in difficult situations. Here is the equation and explanation of its model: Z-Score = 1.2A + 1.4B + 3.3C + 0.6D + 1.0E

Where:

A = Working Capital/Total Assets

B = Retained Earnings/Total Assets

C = Earnings before Interest & Tax/Total Assets

D = Market Value of Equity/Total Liabilities

E = Sales/Total Assets

Here are the rules for interpreting the Altman Z score.

·       When Z is >= 3.0, the firm is most likely safe based on the financial data.

·       When Z is 2.7 to 3.0, the company is probably safe from bankruptcy, but this is in the grey area and caution should be taken.

·       When Z is 1.8 to 2.7, the company is likely to be bankrupt within 2 years.

·       When Z is <= 1.8, the company is highly likely to be bankrupt.

 We ran the numbers for Genting, Singapore and here are the findings for 2014 and 2015:                                    

While there is some improvement over the past year it is still not significant enough to indicate that the bottom is near for shareholders, or that there are brighter days ahead for the company. We concur with Deutsche Bank’s statement that “there is more risk for Genting than the market appreciates.”

 J.P. Morgan, which recently upgraded the shares to neutral, stated that the valuation is expensive at 23x FY16E. The firm also stated that it needed to see sustainable improvement in credit collection and confirmation of this going forward.”

While we are not stating that Genting will file for bankruptcy, we are highlighting some of the  concerns. Other casinos have recovered from scores lower than 1.8 and survived. The Z-Score of course doesn’t take into account growth opportunities. If Genting decides on a new initiative to put the cash on hand to use we would be more bullish and encouraging for its future.

Whether that pertains to major restructuring or sale of the Resorts World Sentosa, we definitely feel that 2016 may in fact be a very trying year for both shareholders and other stakeholders of Genting Singapore.