Genting’s net profit drops 20% to $243m

1H11 results were below our expectations and we had revised our full year estimates to reflect the weak 2 quarter. Further, in view of the downwards revision on GDP as well as the rising economic risks from Western economies, we further reduce Genting’s valuation which was based on 15x EV/EBITDA to 12x EV/EBITDA. Hence, fair value is reduced to $1.59 resulting in a HOLD recommendation.

1H11 results were below our expectations due to an exceptional weak 2 quarter. Management attributed this to lower than expected theoretical win rate of just 2.66% in 2Q11 which resulted in lower adjusted EBITDA of only $352.5m (-35% q-q). In 1Q11, theoretical win rate was 3.8%. Casino expected normal win usually falls between 2.8% to 3%.

Though management harped on the lady luck factor to explain the weaker performance but rolling chip volume had declined. In 2Q11, volume fell by 13% q-q. This illicit the response from management that perhaps their VIP customers need a breather from previous quarter’s losses.

In our opinion, the lower volume may also be attributed to Marina Bay Sands’ successful efforts to ramp up their VIP segment. For the mass market segment, margins remain relatively unchanged. Non-gaming related revenue improved in 2Q11. 1Q11 saw a stronger stream of gaming patrons while 2Q11 had more family friendly crowds because of the school holidays in June.

Visitors to US increased significantly by 40% to 10,300. Spending per pax however fell slightly to S$83. Hotel occupancy improved from 79% to 88% and average daily room rates finally crossed $300 mark. The high occupancy rates are more in-line with our expectations.

Though non-gaming revenue improved, this segment contributes only about 15% of total revenue and between two gaming establishments, one with focus on non-gaming segment; the other with greater proportion derived from gaming, we prefer the latter because it tends to be more lucrative.

Tourist arrivals have been above the 1 million mark in FY11 and are expected to remain strong unless regional economies are affected by economic woes from the Western countries. Strong visitations numbers to Singapore are good news for both the IRs.

Earnings Catalyst
On the gaming side, management has almost fully utilized the available space hence the incremental increase in gaming revenue as a result of adding more tables, slots or saloons make little difference to overall gaming revenue. Going forward, lady luck is more important.Construction of the Westzone is shaping up well, contrary to management’s concerns that there could be delay.

Maritime Experiential park will be opened in August 2011, Transformers in December, together with another 200 rooms. As the last piece of the puzzle, Marine Life Park, falls in place in mid 1H12, Genting’s earnings potential will stagnate. This is likely to be reflected in a flat share price performance. Coupled with their reluctance to return capital to shareholders, we think investors may need to seek an alternative attractive investment proposition.