Tug-Of-Fools: Genting Singapore PLC – The Bull Case

Credit: The Motley Fool

Hey there! I’m Ser Jing, and this is my bull case for Genting Singapore PLC (SGX: G13) for the latest edition of the Tug-of-Fools series.

Most tourists in Singapore – as well as most locals – would likely be familiar with Genting Singapore’s flagship entertainment venue, Resorts World Sentosa. Besides housing an all-important casino (gaming revenue accounts for more than three quarters of the firm’s total sales), the integrated resort also has retail outlets, hotels, and a multitude of leisure activities. Some highlights include the Universal Studios Singapore theme park and the world’s largest oceanarium.

2014 hasn’t been kind to Genting Singapore with the company’s shares declining by 31% from S$1.495 at the start of the year to S$1.03 currently (as of 6 January 2015). This sharp fall has, in part, germinated the seeds for a bull case as Genting Singapore is valued at just 1.3 times its book value at current prices.

Here’s why the company might provide a case for optimism for investors.

The lowest valuation it’s ever been

Genting Singapore's PB ratio

Source: S&P Capital IQ

Genting Singapore’s current valuation is the lowest it has ever carried since 2010, the year when Resorts World Sentosa had its soft launch. The company’s price to book (PB) ratio has steadily declined since peaking above 6 in late 2010; this has happened even as Genting Singapore’s book value per share has nearly doubled in four years from S$0.42 in the fourth quarter of 2010 to S$0.81 in the third quarter of 2014.

You can observe Genting Singapore’s falling PB ratio in the chart above.

Quality assets and promising developments

Of course, depending on a low statistical measure of valuation alone can’t provide enough basis for investors in determining how cheap Genting Singapore really is. After all, a historically cheap share can still become an expensive mistake if its business deteriorates.

Shares with low price to book values often trade as such because their assets might be of flimsy quality. But that’s not really the case with Genting Singapore as there are hardly any questionable intangible assets. Even trade receivables, which are often discounted by conservative investors, makes up only a small portion of the firm’s total assets of S$12.9 billion (as of 30 September 2014).

The table below shows the value of the firm’s properties (largely comprised of the value of Resorts World Sentosa), cash, and financial assets. These assets likely won’t see their dollar values fluctuate much, if at all.

Genting Singapore's financials

Source: Genting Singapore’s filings (data as of 30 September 2014)

Then, there are also promising developments with Genting Singapore that suggests that there’s more room to grow for the firm’s book value.

In mid-2013, the company broke ground for its upcoming 550-room hotel in Jurong. According to the Singapore Business Review, the hotel’s “[s]lated to open in the first half of 2015” and the development is actually “the first hotel to open in the Jurong Lake District which has been earmarked by Singapore’s Urban Redevelopment Authority as a new growth area with commercial, business and leisure facilities.” With the company being able to accommodate more revellers in the future (for perspective, Resorts World Sentosa currently has more than 1,500 rooms amongst its hotels), that’s potential for more gaming revenue.

Genting Singapore’s also looking to expand internationally. The firm’s expected to start work on a US$2.2 billion integrated resort in South Korea’s Jeju Island by the second quarter of this year. The South Korean development, which would be modelled after Resorts World Sentosa, is a partnership between Genting Singapore and China-based developer Landing International Development Ltd.

Meanwhile, the company’s also keeping close tabs on the progress of Japanese politicians possibly lifting a ban on casinos in the country. In Genting Singapore’s latest quarterly earnings release, the company commented that it is “optimistic of the prospects [of gaming in Japan] and are supportive of their efforts to realise the goals of integrated resorts development” in the country.

Strong competitive edge and optionality

Although Genting Singapore’s business might ebb and flow along with the global economy, it’s at least assured of a duopoly dynamic for a few more years. The company, along with U.S.-listed Las Vegas Sands Corp, are the only two entities holding casino licenses in Singapore at the moment – the Casino Regulatory Authority will not be granting any additional licenses for the 10-year period starting from March 2007.

The duopoly-nature of the casino business in Singapore gives Genting Singapore a strong competitive edge which has partly led to significant cash flow production for the company. Since 2010, when Resorts World Sentosa first started opening its doors, the firm has seen its free cash flow grow tremendously as the chart below shows.

Genting Singapore's cash flow history

Source: S&P Capital IQ

The growing free cash flow has enabled the company to strengthen its balance sheet. At the end of 2010, Genting Singapore had S$3.74 billion in cash and financial assets while having S$3.51 billion in total borrowings. Today, the firm’s cash and financial assets have grown to S$5.30 billion (as seen in the earlier table) while its borrowings has decreased to S$1.83 billion.

Having a balance sheet that’s flush with cash gives Genting Singapore the ability to pounce quickly and forcefully on opportunities that may fall its way. And if anything, the company’s track record in increasing its free cash flow despite seeing large dips in operating cash flow might be taken as a sign that firm has the know-how to really utilise its assets to generate cash. This bodes well for the company’s future resort developments.

It’s game on!

So to summarise, from my Foolish vantage point, I see the following positives with Genting Singapore which helped me develop my bull case: 1) A historically low valuation; 2) a balance sheet backed by quality assets; 3) interesting developments which might yet add to the firm’s book value; 4) a strong competitive duopoly position; 5) massive financial resources to take advantage of future opportunities; and 6) a strong track record.

That’s all from me. You can check out the bear case here.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore Chong Ser Jing doesn’t own shares in any companies mentioned.