Genting Singapore - Receivables analysis; reiterate Sell


Significant earnings downside risk; reiterating Sell
We think Genting Singapore's (GENS) receivable clean up exercise poses a major downside risk to consensus estimates. Our revised FY16E profit is 60% below consensus as we believe the market has yet to appreciate the associated risk. GENS trades at 15x FY16E EV/EBITDA (incl. perpetual as debt, 15% above mean) and 53x PE (2-STD above mean) on our forecast. As such, it is still too early to bottom-fish and we fail to see any near-term positive catalyst. We thus reiterate our Sell rating and target price of S$0.50.

Bad debt provision to affect cost and profit
GENS aims to clean up its receivable issues by 3Q16. GENS had S$865m of unimpaired bad debt at end FY14. Netting off impairment made in 9M15 and assuming no new bad debt; it still has S$640m of unimpaired bad debts. We assume average S$90m/qtr provision (4Q15-3Q16), which will lower bad debt to S$284m but will also lift COGS by 20%, prompting 27% FY16 profit cut.

Shifting to mass focus but cannot fully compensate VIP vacuum
GENS has seen quarters with a rise in mass mix but accompanied by a drop in EBITDA margins. This is due to an inflexible cost base and inclusion of premium mass. Based on our calculation, the S$20m/qtr EBITDA vacuum from VIP requires 20% YoY or S$57m/qrtr improvement in mass revenue, which we think is tough to achieve. In addition, the inclusion of premium mass will erode mass margins as it consists of lower margin players.

Technical Analysis
Daily Chart
Mean reversion on earnings cut sufficient to pressure GENS share price; risks
We roll over target PE of 35x (mean) base to FY16. Our TP stays unchanged as we cut FY16E EPS by 27%. EV/EBITDA is not suitable due to different tax treatment vs. Macau peers, perpetual securities cost, and derivative exposures, which complicate EBITDA derivation.

Risks:
1) higher-than-expected payout ratio,

2) bad debt write-back, and

3) major advances in gaming revenue. (Read Report)

Source : Deutsche Bank Markets Research

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