There Might Be A $1.1 Billion Hole In Genting Singapore PLC’s Pocket

In 2008, the future looked bleak for Genting Singapore PLC (SGX: G13). Back then, the global financial crisis was unfolding and investors were unsure if Genting Singapore would ever be able to raise the funds needed to complete Resorts World Sentosa in an environment where capital was extremely scarce.

There and back again

But, the firm did manage to develop the integrated resort and its doors first opened in early 2010.

With the soft launch of Resorts World Sentosa, Genting Singapore’s share price rocketed as investors were likely excited by the company’s prospects; from a low of less than S$0.90 in April 2010, Genting Singapore’s shares ended the year at nearly S$2.20.

But since then, shares of Genting Singapore started falling steadily and sits at S$0.95 at the moment. Although part of the reason for the drop might be due to investors’ irrational exuberance over Resorts World Sentosa, it could also be a reflection of a potential crisis that’s looming for Genting Singapore – a S$1.1 billion crisis.

A giant burning hole

Due to the clampdown in corruption by the Chinese government, casinos around the region have seen a sharp drop in their gaming volume. Genting Singapore was not spared; in the fourth quarter of 2014, the company experienced an 8% year-on-year decline in revenue. But, a falling top-line might be the lesser of Genting Singapore’s worries.

High rollers, or premium players as Genting Singapore calls them, contributes a large portion of the company’s revenue. However, many of those premium players are actually allowed to gamble in Genting Singapore’s casino using credit that’s extended by the company. What this means is gambling losses incurred by the premium players who played using credit can be paid at a later date and are thus treated as trade receivables by Genting Singapore.

A quick look at the company’s latest balance sheet shows that it has current trade and other receivables (receivables that are due by 31 December 2015) of more than S$1.1 billion as of 31 December 2014. That is a significant amount. For some perspective, that’s 38.5% of Genting Singapore’s revenue for 2014 and nearly 1.7 times its net profit.

Having receivables which can be collected on time is all right. The issue here is that more bad debts may be on the table for Genting Singapore. In 2014, the integrated resort owner had to impair S$262 million worth of trade receivables (to impair is to essentially treat the receivable as uncollectable), up 42% from 2013.

The increase in impairment, as well as the sheer size of the dollar amount of those receivables, should really prompt shareholders to question how much of the S$1.1 billion in receivables is actually recoverable. It is a black box for investors to ponder and could potentially become a big burning hole in Genting Singapore’s pocket.

Foolish Summary

Imagine lending S$1.1 billion to a gambler who is most likely to be a tourist and who now has to return to his home country if he’s not already back home. Recovering that S$1.1 billion may not be a situation that can easily be resolved.

Hopefully, Genting Singapore’s management can help its investors understand the whole issue better in official statements or during its upcoming Annual General Meeting (AGM) this year.

To keep up to date on the latest financial and stock market news, sign up now for a FREE subscription to The Motley Fool's weekly investing newsletter, Take Stock SingaporeWritten by David KuoTake Stock Singapore tells you exactly what's happening in today's markets, and shows how you can GROW your wealth in the years ahead.

The Motley Fool's purpose is to help the world invest, better. Like us on Facebook  to keep up-to-date with our latest news and articles.

The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Stanley Lim owns Genting Singapore PLC.