Hi, guys. Been wanting to do this for quite some time now, a simple company analysis for ordinary investors out there. A bit of background on me, I graduated with a degree in economics and mathematics and worked for a sovereign wealth fund before for a year. I do want to improve my investment and financial skills through these type of exercises but ultimately, I hope these type of posts can benefit people who would like to get their hands into investments. I have done this analysis according to publicly available information ( AKA Google) so it is not that hard to replicate. Too many retail investors have suffered under the hands of the big players so I hope this can help us in leveling the playing field in the market. Please find my worksheet that I used here Genting Malaysia Berhad Model v8 . Post Image from Calvinayre.com
Genting Malaysia Berhad (BUY, TP: RM6.39)
In the business of casino, hotels, theme parks and retail/property development. Has exposure mainly in Malaysia, United States and United Kingdom. Listed in the Malaysian Stock Market, KLSE.
Corporate Structure (From Genting AR16)
Share Price and Dividend Record
- From May 2012 to May 2017, share price has traded between RM3.28 – RM6.02. It has recently traded above RM5.00 and has breached the RM6.00 mark once this year.
- Performance between 2012 to 2017 has been relatively flat with an upward trend in 2013-2014 (23% Total Shareholder Return) and downward trend in 2014-2015 (-7.3% TSR).
- From 2017 onwards however, there has been an upward trend in its share price with YTD TSR of 26.6%.
- If you have invested in the beginning of 2013 and sold in May 2017, you would have generated a total return of 62.5% and an annual return of 6.4% (CAGR terms)
- Dividend yield however has been on the low side from 2012 to 2016 with only 2015 generating a 6.0% yield
- There is a need to restate the income statement without the “Other Income” portion for Genting Malaysia Berhad so that we get a better view of its operations. GMB sold Resorts World Limited shares worth RM1.7bn to Golden Hope Limited in 2016, in which Tan Sri Lim Kok Thay and Lim Keong Hui (Tan Sri’s son) have deemed interest, which is included in the Other income portion. The inclusion of the Other Income Portion greatly exaggerates the EBITDA and Net Income numbers especially for 2016. My view is that this transaction resembles an intercompany transaction and should be excluded.
- Revenue growth has been on an upward trend from 2014 with 2016 registering the highest growth at 6.4% with a recovery in its UK operations. Leisure and Hospitality segment (Casion, Hotel and Theme Park business) continues to be the main core business of Genting Malaysia Berhad at more than 90% of revenue, and Malaysia continues to be the main contributor at ~65% of revenue. Operating expense growth however exceeded revenue growth but has stabilised in 2016.
- GP, EBITDA and Net Income margins looks steady, with a recovery in 2016. Although, they are by no means spectacular margins at a 7-16% net income margin range. Margins might recover to 2013 levels if the new US casino in Massachusetts pans out well.
- Some caution needs to be exercised to Genting Malaysia’s cost structure. Its COGS and SGA are quite variable and doesn’t seem to scale equivalently with revenue, causing margins in 2015 to be much lower as compared to previous years. I interpreted 2016 however as a good year as they were able to contain its cost by reducing other operational expenses and maintaining COGS even though revenue increased.
- My biggest concern for the company now is its ability to repay its interest and debt principal. Its debt coverage ratio (calculated as (Interest + ST debt + Principal Repayment)/Operational Cash Flow) is increasing from 2013-2016, and is currently at 54% which is high. The interest coverage ratio has also been increasing to about 13.2% currently. Genting Malaysia’s debt capital structure has doubled between 2014 and 2015 but remains low at ~20%.
- Something to note on Genting’s CAPEX and PPE is that they have undergone rapid growth in the last 3 years. Currently, Genting is involved in the reahuling of its theme park in Genting Highlands and opening a new Resorts World Las Vegas as its major projects. CAPEX and PPE has been high for this time period, but is expected to slow down in its focus in concentrating on its businesses after completion.
Main Macro Fundamentals
- Based on Genting Malaysia’s core business of gaming (gambling) and theme parks, it is crucial to understand what drives these 2 industries.
- Gaming (Gambling)
How does a casino make money? A customer comes in and deposit RM100 for credit equivalent to gamble in the slot machines, blackjack, pokers and etc. At the end of the day, he is only left with RM40, meaning the casino is only obligated to return RM40, making RM60 in the meantime. So more customers coming to gamble means more revenue for the casino. The richer a customer is, the more money he will have to gamble. From this, an analysis of the wealth of its customers will be important to determine the fundamentals of the gambling business.
- Theme Park
Theme parks make money by charging a fixed fee on each visitor in exchange for entertainment in the form of rides and experience. The theme park industry is highly dependent on the customer’s disposable income growth, as it grows only when people’s income after necessities grows. It is not something the customer needs, but rather would only buy if they have the extra cash for it. So the industry is highly vulnerable and exposed to any macro recessions and shocks to income. As most visitors and clients are one-time, its important to replenish the offerings the theme park has over time to generate renewed interest in the attractions.
- Gaming (Gambling)
- Both industries are highly dependent on the overall economic growth environment. Malaysia’s growth rate has been declining due to the softening of the global markets. This trend is also found in China and the World. According to the World Bank projections, Malaysia and the World’s growth rate is expected to recover slightly from 4.2% and 2.3% to 4.5% and 2.9% from 2016 to 2019, while China’s growth is projected to decline further from 6.7% to 6.3%.
Source: World Bank
- As Malaysia is still the dominant segment at ~65%, let’s start by examining the GDP growth of Malaysia, and its correlation to the revenue numbers and visitors number. First look at the correlations reveal that there are persistent negative correlations of growth rates to Genting’s visitors, which is counterintuitive. Only the growth rate of China is positively correlated to the revenue of Genting Malaysia Berhad, while Malaysia and World growth rates is negatively correlated. This is unexpected to be honest, but this means that more work should be put into researching the macro environment that companies operate in. Regardless, this indicates that there is some supporting evidence for the influence of Chinese wealth on the revenue of the Malaysian segment of Genting.
- In terms of visitor numbers to Malaysia, there has been a consistent increase in tourist arrivals. China in 2016, registered a 26% growth, helped by relaxation of visa requirements to Chinese nationals and a general trend of increased outbound tourist from China. Tourists from China have undergone rapid growth throughout the years and now encompasses about 8% of total visitor arrivals.
Source: Tourism Malaysia
Goldman Sachs in its report “Chinese Tourist Boom”, projected that the number of Chinese residents who will travel overseas will increase from 120m in 2015 to 220m in 2025 and the amount they will spend on travel overseas will increase from $200bn to $450bn in 2025. There is a lot of potential in the Chinese tourist market as only 4% of Chinese nationals hold passport as opposed to the US at 35%. GS is projecting that this figure will increase to 12% in 2025. I predict that most of Genting’s revenue will increasingly be generated by the Chinese market, as its casino locations in the UK and US are hotspots for Chinese tourism.
Key Developments and Projects
- In 2013, Genting embarked on its Genting Integrated Tourism Plan to invest RM10.83bn in the projects below. Genting has invested RM4.3bn to date and allocated RM3bn for ongoing works. (Source: Edge Markets) The GTIP is expected to be completed by 2023 in line with its GTIP 10 year program from 2013.
- 20th Century Fox
Schedule Opening at the end of 2017
- 1,300 room First World Hotel
Genting Malaysia Casino closed and gaming tables shifted to new Sky Casino
- Indoor Theme Park
- All-Suite Premium Luxury Hotel
- Sky Avenue Lifestyle Mall and Sky Plaza
Sky Casino’s 1st and 2nd floor opened for business with remaining 3rd and 4th
- High-speed cable car system
- 20th Century Fox
Financial Valuation (Please find my valuation in the tab called “Valuation”)
- I will be utilising a DCF valuation on Genting. How I will value this is to value Genting without the GITP program and then add the GITP committed CAPEX on top of it.
- Basically, my assumptions for my DCF are as follows:
- The result of my valuation is as follows with a target price of RM6.39 and actually exceeds most of the analyst target price. The main determinant for this is the GITP value. My view on this is that this is a fair value for the GITP masterplan, as any value less than this means that the project generates negative IRR. The resultant P/E of 12.52 is on the low side but is fair considering the uncertainty around the GITP impact to the cash flow.
- This is a simple straightforward valuation in my opinion. Feel free to tinker around with the assumptions in the excel file. Please find below a list of the analyst recommendation from i3 Investor.
My conclusion from Genting Malaysia Berhad is BUY with a target price of RM6.39. There are some growth prospects in the GITP with renewal of theme park attractions and I think Genting Malaysia Berhad is well positioned to take advantage of the bull trend in Chinese tourism with its casinos and entertainment outlets in Malaysia, UK and the US.