Spotlight on Genting EGM

Some analysts pessimistic about UK casino purchase due to challenging operating environment

 

PETALING JAYA: While the investing community may now be re-looking at Genting Malaysia Bhd due to its new flavour as an international play, just earlier this year this casino operator did not have a compelling story to tell.

Sure, profits were decent and it was sitting on a cash pile of some RM5bil, but that cash hoard was becoming more of a hurdle as all that money wasn’t doing anything.

 

Then came the announcement in early July that Genting Malaysia was setting its sights on its United Kingdom (UK) casino operations following the proposed acquisition of four casinos from Genting Singapore plc.

 

Analysts and shareholders kicked up a fuss, with what was seen as a clear-cut related party transaction.

 

Genting Malaysia announced that it was proposing to acquire Genting Singapore’s UK casino operations for £340mil (about RM1.67bil). Genting Singapore first bought Genting UK in 2006 at £626.91mil (RM3.13bil)

 

The UK casino operations comprise four companies – Nedby Ltd, Palomino Star Ltd, Palomino World Ltd and Genting International Enterprises (Singapore) Pte Ltd – collectively known as Genting UK.

 

Gambling in the UK is regulated by the Gambling Commission on behalf of the government’s Department for Culture, Media and Sport under the Gambling Act 2005.

 

There have been significant updates to UK’s gambling laws, including increasing tax on poker profits from 15% to as high as 50% depending on profitability. There have also been increased rates on all categories of amusement machine licence duty.

 

These measures are likely to continue to dampen the gaming enviroment in the UK and some analysts are pessimistic because of the challenging operating environment.

 

There are concerns that Genting Malaysia could be buying Genting UK at a time when the economy is not only weak, but faces a double whammy of the casino industry facing tough legislation.

 

Hence, all eyes will be on Genting Malaysia’s EGM tomorrow to approve the acquisition of Genting UK from Genting Singapore Plc Genting Malaysia’s second quarter results to June 30, will be also released on Aug 26.

 

Genting Malaysia has been on a roadshow in the last few weeks to meet up with its shareholders and to explain the rationale and potentential of buying into the UK casino operations.

 

Last week at Genting Singapore’s EGM, the resolution in respect of the sale of UK casino assets to Genting Malaysia passed by shareholders.

 

It is however interesting to note that over the last two days, Genting Malaysia has bought back a total of 11.2 million shares at an average price of RM3.03. This brings its cumulative treasury shares held at 3.71%.

 

The group has announced its intention to purchase up to a further 376 million shares (representing 6.4% of share cap) within the next 10 months.

 

Meanwhile last week, Genting Malaysia Bhd obtained all the necessary approvals and signed the agreement to develop the Aqueduct New York racino.

 

Genting New York is expected to invest US$1.3bil which consist of US$380mil (RM1.22bil) of licencing fee, US$350mil (RM1.12bil) initial capital expenditure (4,500 video lottery terminals), and US$650mil (RM2.08bil) to build three hotels of differing standards, shopping, recreation, spa and other resort facilities.

 

Dubbed Resorts World New York, the proposed three-storey facility will also contain several restaurants, water features, an outdoor terrace connected to the Aqueduct racetrack which will be able to accommodate up to 10,000 people and a 2,200-bay car park.

 

Genting New York aims to complete the entire development within 12 months from the date it obtains formal approval from the state to proceed.

 

As part of a wider development plan, Genting New York is also proposing to build three hotels of differing standards, shopping, recreation, spa and other resort facilities at a total cost of US$650mil (RM2.09bil). That will take the proposed outlay for the entire project to over US$1.3bil.

 

“If we assume daily win per terminal of US$300 (similar to the more successful Yonkers racino closer to New York city centre), Resorts World New York may contribute RM595mil and RM196mil to Genting Malaysia’s revenue and profit after tax respectively by 2013,” said an analyst from HwangDBS Research.

 

UOBKayHian reckons that the project is neutral to Genting Malaysia’s revised net asset value but is slightly earnings-accretive over the long term, assuming that the Aqueduct would be eventually given a license to operate table games.

 

The research house estimates the slot facility could provide a payback period of 5.5 years (on full expansion), while the payback period for the rest of the facilities could be significantly longer.

“Conservatively, Aqueduct could pull in revenue and operating profit of US$468mil and US$84mil respectively when it is fully expanded.

“This accounts for about 14% of Genting Malaysia’s forecasted 2012 operating profit,” said the research house.

The recent spotlight on the entire Genting group has been brought about by Genting Singapore’s sterling results and the re-rating of casino sector in Singapore. Genting Singapore is 52% owned by Genting Bhd.

Genting Singapore’s second-quarter results took the investing community by surprise, when it beat analysts and consensus estimates.

For the second quarter ended June 30, Genting Singapore posted a net profit of S$396.5mil (RM925.9mil) compared with a net loss of S$50.7mil a year earlier.

Revenue soared to S$979.3mil from S$120.1mil previously. This translated to a profit margin of about 40%.