Genting Singapore - 3Q15: Headline net profit impacted by impairments and fair value losses

As expected, Genting Singapore's (GENS) 3Q15 headline net profit of SG$37 mn (-61.6% YoY) was weighed down by two large items:

(1) impairment loss on trade receivables (SG$92.5 mn) and

(2) fair value loss on derivative financial instruments and impairment loss for AFS financial assets (totals SG$124.9 mn).

While GENS's revenue was largely in line (+10.0% QoQ, -1.4% YoY), its adjusted EBITDA (+8.0% QoQ, -17.6% YoY) came in below our estimates, mainly due to lower-than-expected volumes in its VIP business (-20% QoQ, -50% YoY).

Factoring in the weaker-than-expected results, we reduce our 2015E EBITDA and net profit forecast by 6.5% and 11.4% respectively, but leave our estimates for 2016E/17E unchanged.

All in, we retain our OUTPERFORM rating on GENS and reiterate our view that investors should buy GENS on any potential weakness in the near term as the stock is looking more interesting for long-term investors, in our view.

Headline net profit weighed down by impairments and fair value losses, as expected Genting Singapore's (GENS) 3Q15 headline net profit of SG$37 mn (- 61.6% YoY), was weighed down by two large items:

(1) impairment loss on trade receivables (3Q15: SG$92.5 mn vs 2Q15: SG$56.6 mn) and

(2) fair value loss on derivative financial instruments and impairment loss for AFS financial assets (3Q15: SG$124.9 mn vs 2Q15: SG$95.0 mn).

Adjusting for one-offs, GENS's 3Q15 net profit would have still slightly missed consensus and our forecasts (9M15 core net profit forms 65.1% of consensus and 68.8% of our full-year forecast). During yesterday's conference call, management subtly guided that the AFS financial assets are already close to its intrinsic value. Hence further losses, if any, will not be as significant anymore.

Mass business remain stable but VIP business shrinks 
While GENS's revenue was largely in line (+10.0% QoQ, -1.4% YoY), its adjusted EBITDA (+8.0% QoQ, -17.6% YoY) was below estimates, mainly due to lower-than-expected volumes in its VIP business.

In line with management's conservative approach towards its VIP business, GENS reported its lowest VIP volume (SG$9 bn: -20% QoQ, - 50% YoY) and market share (36%) in 3Q15. This may explain Marina Bay Sand's (MBS) strong 25.4% YoY growth in VIP volumes as players 'crosses over', given GENS's stricter credit extension policies.

GENS's mass volumes remained fairly stable (flat QoQ). While GENS lost some market share in the mass market segment to MBS, we think GENS could wrestle market share from MBS, once it begins ramping up marketing and promotional activities for its premium mass business. Its additional hotel capacity will be an added advantage.

Thesis on mass market recovery remains intact
While 4Q15 is expected to be better, supported by stronger tourist arrivals, we reduce our 2015E EBITDA and net profit forecast by 6.5% and 11.4%, respectively, to factor in the weaker-than-expected 3Q15 results. That said, we leave our estimates for 2016E/17E unchanged. As a reminder, our recovery thesis for 2016E will be underpinned by growth in its mass market segment.

Technical Analysis
Daily Chart
Limited downside from here, maintain OUTPERFORM
We retain our OUTPERFORM rating on GENS and reiterate our view that investors should buy GENS on any potential weakness in the near term. Based on GENS's latest financial statement, our analysis on GENS's balance sheet points out that GENS should be worth SG$0.76/share, in a worst case scenario, assuming zero recoverability for receivables and AFS financial assets. Moreover, we believe that the negative implications of GENS's VIP business, receivables and AFS securities are now fully understood by the market, and GENS now looks more interesting for long-term investors. (Read Report)

Read Related Reports
1) Genting Singapore - Not out of the woods yet by DBS Group Research, published on 13 November 2015

2) Genting Singapore - VIP market troubles; D/G to HOLD by Maybank Kim Eng Research, published on 13 November 2015

3) Genting Singapore - Dragged Down By Bad Debts Provision by RHB Research, published on 13 November 2015

4) Genting Singapore - Downgrade to SELL? by OCBC Investment Research, published on 13 November 2015

5) Genting Singapore - Better luck but not out of the woods yet by CIMB Research, published on 12 November 2015

Source : Credit Suisse Asia Pacific Equity Research

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