Value emerging in Genting

KUALA LUMPUR: HwangDBS Vickers Research sees value emerging in Genting Bhd and Resorts World Bhd, advocating investors to switch from Berjaya Sports Toto Bhd (BToto).

"We upgrade Genting, with a target price of RM4.20, based on sum-of-parts, and Resorts, with a target price of RM2.60, based on 14.2 times forward price-to-earnings, to buy from hold, as we see limited downside, with valuations hitting Sept 11/SARS trough, at 10 times 2010 PE," the research house said.

It added prices of both stocks had fallen between 28% and 30% since November 2009, after the announcement of a RM350 million related party transaction, versus the Kuala Lumpur Composite Index's (KLCI’s rise of 2%.

Excluding Resorts’ RM4.8 billion cash pile, the market valued its gaming business at only 6.5 times 2010 PE, while investors would be getting the rest of Genting’s non-listed business, namely power, oil and gas, and property, for free, it said.

"We advocate investors to switch from BToto, as too much expectation has been built in for a 75% dividend payout (9MFY09: 59%) and special dividend, which may not materialise," HwangDBS said.

The research house has a "fully valued" rating on BToto's stock.

Meanwhile, the research house is positive on the gaming sector, given resilient visitor arrivals and number forecast operator spending.It said, however, risks to the stocks included high foreign shareholding of 33% and 35% for Resorts and Genting, respectively, corporate governance issues and a potential cash call by Resorts unit Star Cruises Ltd, adding that it believed this had been priced in, given the "massive" 75% discount implied on Resorts net cash.

Other risks included further impairment losses on Genting's investments in Genting Stanley UK and Star Cruises, after having already written down RM1.9 billion in total over the past two years, it said.

On Resorts gaming business, the research house added the company's valuations matched its 1998 all-time low, and while average spending could ease due to fewer VIP patrons with the commencement of both Singapore integrated resorts by 2010 visitor arrivals to Genting Highlands are expected to remain resilient, as proven in the past."We expect Resorts to continue to chalk strong average operating cash flow of RM1.3 billion over the next three years," it said.

Meanwhile, it said although Genting's stock price had rebounded by 10% from its recent low, it had only factored in the market value of its listed investments, virtually ignoring its power, oil and gas and property segments, despite Ebit contribution of between RM300 million and RM400 million annually.It added at an expected growth of 20%, Genting would see the strongest earnings growth in the gaming sector in 2010, with maiden contributions from Resorts World at Sentosa, of which the soft opening was scheduled for first quarter of 2010 (1Q2010).

In comparison to Genting and Resorts, HwangDBS said BToto was trading at a "rich" 14 times FY10 PE and 4.6% net dividend yield, versus KLCI's 4.3%."The market has been speculating a special dividend because parent, Berjaya Land Bhd, would need up to RM882 million if exchangeable bondholders exercise a put option for early redemption in August 2009."We think this is unlikely as BToto would not be able to pay out that much dividend — net gearing would need to increase to 370% — and Berjaya Land can still raise cash via asset sale and gear up (net gearing: 40%)," it said.