Thursday, April 4, 2019

Genting Singapore Ltd - My Thoughts On The IR Expansion Plan

This is a follow up from the previous article on Genting which I’ve written not too long ago. You can view them Here if you have not done so. 

The big news on Genting is finally out of the bag which we've been waiting for sometime.

Redevelopment of RWS Expansion

Resort World Sentosa Pte Ltd, a wholly owned subsidiary of Genting Singapore Ltd, has been granted approval for extension of their Integrated Resort over the next 5 years. This will see the existing IR Property expanded with approximately 50% of new gross floor area, adding 164,000 square metres of GFA of leisure and entertainment space. Development and enhancement of the integrated resorts will also include:

  • Expansion of Universal Studios Singapore, with 2 new highly themed and immersive environment – Minion Park and Super Nintendo World
  • Expansion of the S.E.A Aquarium to be re-branded as “Singapore Oceanarium” 
  • Conversion of the Resorts World Theatre into a new Adventure Dining Playhouse 
  • Expansion of in-resort accommodation with up to 1,100 more hotel rooms at a new waterfront lifestyle complex and within the central zone of the RWS 
  • Enhanced waterfront promenade to be lined with restaurants and retail outlets 
  • Expansion of MICE facilities to bring more events into Singapore 
  • Development of Driverless Transport System which will enhance last-mile connectivity to RWS attractions

The development of the IR expansion will involve the intensification of land and a related grant of leasehold interest and license from SDC. 

The redevelopment is expected to cost Genting approximately $4.5b over the next 5 years, and will be funded by internal working capitals and/or borrowings.

Higher Taxes On Gaming Revenues

The current moratorium expires in February 2022 where Genting currently pays taxes on the Gross Gaming Revenue - 5% taxes for premium gaming and 15% for mass gaming. 

If you’d like to read more on the applicable taxes application, you can read the website from IRAS Here

The new 10 year moratorium will subject the IRs to tiered taxes between 8% to 12% for premium gaming and 18% and 22% for mass gaming so there will be downward impact to the NOPAT. 

While this is a regulatory risk that Genting has to take in, I believe they have the ability to lobby against the regulators because this will impact the overall tourism sector of Singapore. I trust that the Singapore government will not want to kill their own goose that helps them lay the eggs they need.

How Genting Share Price Reacts To This News

The share price of Genting falls to as low as 96 cents today, which is about 9% drop from yesterday closing.

Based on market movement today, it doesn’t seem to take this news well for a number of reasons. 

First, it is almost certain that Genting will go back into net debt territory by borrowing to fund the capex on this redevelopment. One of the main reason is because they would want to conserve a good amount of cash in their book for the Japan resort bidding and they have to show that their current liquidity can support that. 

Borrowing is not necessarily a bad thing if the intention is to support growth capex and Genting is doing that. 

In fact, if we rewind the story, this is similar when they first won the earlier IR bid to develop Integrated Resort Sentosa back in 2007 where they had to spend $5.2b between 2006 to 2010 before going operational in 2010. 

They funded via internal borrowings and within 4 years after operational in 2014 they went back into net cash position. (see my previous article spreadsheet). 

That’s how strong their cashflow is. 

Based on similar prospect, it will take approximately 4 years after operational for them to break-even on the $4.5b. 

Majority of the $4.5b will be capex, so we will only see the effect of depreciation on the P&L after the project has gone operational in 2025. 

Investors should not expect any bump up increase in the dividends payout during the interim but based on past historical management has been pretty generous with the corresponding increase in payout.

Past 8 Years DCF

I tried to run a DCF simulation to see if the subsequent increase in cashflow from the expansion is worth the amount of capex they have to pay. 

But first let’s see what happens to the cashflow when the original IR went operational in 2010. 

What I wanted to show here is that while the upfront capex is high, the maintenance capex thereafter is minimal once they started to run operationally. This leads to a copious amount of cashflow exponentially being generated from 2011 to 2018.

Next 10 Years DCF

The hardest part of this exercise is to forecast the cashflow for the next 10 years, which we had to brew in certain assumptions on the variables.

Here’s some of the assumptions I’ve used:
  • Capex to commence from FY2019 to FY2025 which includes maintenance capex they need to maintain to run the current operations. 
  • Depreciation on the growth capex starts to kick in after FY2025. 
  • Minimal maintenance capex is required once the new IRs expansion has gone operational in FY2025. 
  • We assume capex vs opex to be in the range of 80/20 – Near term P&L impact to be minimal at 20%, divided over 5 years. I have made downward adjustment to the Operating Cashflow in FY2019 by 4% each year until FY2025. 
  • There is a tax impact increase based on the latest moratorium which further impacts the nopat, so I have made further downward adjustment to the Operating Cashflow from FY2022 onwards by 4%. 
  • After going operational in FY2025, I have made upward adjustment to the Operating Cashflow by 50%.

This is what you get.

Then, I tabulate and tally the total cashflow in the next 10 years and then use the NPV formula in excel to discount it to the present value using the discounted rate between 7% to 9%.

I add back the current net cash position they have in their book (i.e $3.3b) to get the equity value.

I divide the following by the outstanding number of shares (12,094,027,000) and I get my intrinsic value of the company.

What the table below is saying is that if you discount them using 8% wacc and assign a multiple earnings of 18x PER, then you get a target price of $1.26. Obviously, the more ambitious you are on the earnings multiple and lower wacc used, the higher value you are going to get.


I can see why the market may not like the news but the way they are beaten down today is a bit of a surprise to be honest. Usually, market loves positive news like this where they are sentiment driven but the impact to which they are beaten down today is rather severe. 

I have a strong feeling that this is work of a shortist in play. 

Neither the tax impact nor the levy increase are significant enough to bring it down like that. 

I wonder if we will see similar reaction if they are awarded the Japan bidding. 

If you are investor waiting to get in, I think patience is key simply because their growth won't materialise that fast anyway. 

Meanwhile, I want to ensure that I am paid well enough for waiting. 

Back envelope calculation shows that at 3.5 cents payout, a 4% yield would point out to 87.5 cents. 

At 87.5 cents, the fcf yield would have been at 9.7%. 

If you want more margin of safety, you can wait until the fcf yield is above 10%. That is pricing it at 84 cents. 

I think that is good enough margin of safety and would be my preferred entrance point to make a conviction buy.

Thanks for reading.

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  1. Thanks for sharing your insights on Genting. Much needed. Very useful.

  2. Hi B,

    When I saw the news, the immediate beneficiaries i can think of is those from construction instead

    What i wrote in my blog:
    Do look around construction companies and construction supply companies. rWS and MBs spending 9 billions. Assume construction takes place over 3 years, and annual demand of construction in Singapore is in the range of |28 billion to 32 billion. Its 10 percent more, at the backdrop of continous govt spending on MRT lines.

    Pan united is a big player in cement, and while MBS or RWS might use their own construction companies or overseas companies. No one is reallg going to ship cement from overseas.


    The valuation of Pan United is not really attractive to me thou... even assuming 10-15% growth and a corresponding increase in dividends (Optimistic le)

    so zzzzz

  3. Hi B,

    I'm new to investing, pardon my ignorant qns, for your calculation of fcf yield 9.7%, you've used 2018Actual FCF and also 2019Q1 divd for calculating (if i'm not wrong).
    1) Upon starting rws expansions, taxes tiered, would using 4% divd yield (using 3.5cents) be overly optimistic to purely gauge an entry price of 87.5cents vs the intrinsic values you've used WACC/PER to calculate? I think I understand that the NPV values incorporates future expected FCF based on assumptions made, the valuation of 87.5 cents, how does it work together with the target price of 1.26?

    Thanks for taking time to guide me.

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