Genting Malaysia to face stiff competition
Posted on January 8, 2010, Friday
Company’s Asean monopoly will be consigned to history when two new casinos open in S’pore: Maybank
KUCHING: The two casinos which is slated to open in Singapore in the near future is expected to pose stiff competition for Genting Malaysia Bhd’s (Genting Malaysia) business.
Maybank Investment Bank Bhd (Maybank) in a research report cited that Genting Bhd’s (Genting) long standing Asean monopoly in the large casino space will be consigned to history when two new integrated resorts open in Singapore.
To recap, Resorts World at Sentosa, owned by sister-company Genting Singapore Ltd will open very soon whilst Marina Bay Sands, which is part of the US-based Las Vegas Sands Corporation is set to follow later in the year.
Meanwhile, the research firm observed that Genting Malaysia received 19.2 million visitors in 2008 whilst 6 per cent or 1.2 million of these were from Singapore.
Additionally, other large visitor groups came from India, Middle East, Taiwan, Vietnam and Indonesia.
Maybank believed that substantial numbers of these overseas visitors would be tempted by the offerings of new casinos in Singapore for their values.
It noted that besides Singaporeans and foreigners chose to divert to the new integrated resorts, Malaysians would also be attracted to visit given the proximity and ease of travel to Singapore.
The research firm also observed that 73 per cent of the visitors to Genting Malaysia were day-trippers with most of them consisting of Malaysia residents.
Hence, Maybank forecasted 10 per cent gaming revenue contraction at Genting Malaysia in 2010, leading to a 17 per cent decline in recurring net profit. It estimated that revenue might be even lower that its forecast if the Singapore integrated resorts proved particularly alluring, especially to high-rollers.
However, it noted that revenue might be resilient but at the expense of margins as Genting Malaysia offered heavy promotions to retain its client base.
On the other hand, Resorts World at Sentosa reportedly expected 15 million visitors in its first year of operations, with international visitors making up 60 per cent of the total.
Another setback to Genting Malaysia’s business would be the cutting of subsidies. Maybank pointed out that the government is fine-tuning the delivery of subsidies to target only the needy.
It said reduced subsidies are expected to be implemented for petrol, rice, cooking oil and potentially sugar and flour. In the meantime, electricity tariffs were slated for review and Project Lebuhraya Utara Selatan’s (Plus) highway toll rates which were supposed to have been raised in 2008 could be raised this year.
The research firm observed that consumption spending could be affected as households faced higher prices for most goods. Further, Maybank viewed that there were few catalysts for upward re-rating for Genting Malaysia.
This include the possibility that 19 per cent-owned Genting Hong Kong, formerly known as Star Cruises may need capital injection as well as Genting Malaysia might conduct more related party transactions.
The research firm observed that Genting Hong Kong lost US$63 million in the six months ended June 30, 2009.
It had US$98 million cash and US$569 million of borrowings on June 30, 2009.
Besides that, Genting Hong Kong’s 50 per cent controlled joint venture, NCL Corporation Ltd said in its interim statement for the quarter ended September 2010 that it had sufficient cash and financing resources for the next 12 months.
In contrast, Maybank stated that there was no assurance that cash flows from operations and additional financing will be available in the future to fund Genting Hong Kong’s future obligations.
Therefore, Maybank downgraded Genting Malaysia’s shares price from buy to sell on lower cash flows projections.
Its key assumptions included medium term revenue growth of 4 per cent, 2 per cent terminal growth and 11.7 per cent equity discount rate based on 4 per cent risk free rate, 6.5 per cent market risk premium and 1.1 market risk.
The research firm pegged Genting Malaysia’s 12-month target price at RM2.40 per share.
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