The group’s
FY11 adjusted EBITDA of SGD1,647.7m made up 94.5% of our full year forecast,
relatively in line with consensus and our forecasts. It has declared a maiden
dividend of 1 sen/share, representing a payout ratio of 12%. Following our downward
revision in earnings and factoring in a lower EV/EBITDA multiple of 12x vs 13x
given its deliberate slowdown of VIP growth in 1H2012, we are revising downwards
our fair value from SGD2.14 to SGD1.84. Consequently, we downgrade the stock to
NEUTRAL given the subdued immediate growth outlook. An earlier than anticipated legalization of
junket trips in Singapore is the key upside risk to our view.
Strong VIP win rate, lower tax rate prop up
4QFY11. The group’s 4QFY11 core earnings jumped 19.6%
q-o-q while full-year FY11 earnings and EBITDA expanded by 31.1% and 16.2%
respectively. Q-o-q, earnings were largely driven by the stronger 3.90% win rate
in its VIP segment vs 3.17% in 3Q11 and a lower effective corporate tax rate of
13% vs the normalized 19%. Normalizing theoretical win rates of 2.85% would have
generated normalized EBITDA of SGD300m for the quarter vs SGD398.7m in 4Q11,
implying a 26% q-o-q decline in VIP rolling chip volumes. More positively, provisions for doubtful
debts declined substantially by 63.6% q-o-q while receivables remained
flattish, which reflect the group’s tighter and more cautious VIP credit
policy.
Exceptionally cautious view drags 4Q11
performance. Given the fact that junket operations have
yet to be legalized in Singapore and amid the more cautious VIP credit policy
management adopted from 3Q11, the relatively poor VIP rolling chips volume in 4Q11
was not entirely surprising. With Marina Bay Sands (MBS) also turning even more
cautious in 4Q11, Resorts World at Sentosa managed to claw back VIP market
share despite a 26% q-o-q drop in VIP volume. This highlights the importance of
junket operations in helping the Singapore VIP casino market make the quantum
leap, similar to the vital role junkets play in Macau. Management remains
optimistic that junket operations would eventually be legalized in Singapore
but it has been speculated that these may be restricted to foreign VIP
customers. Moving forward, management stressed that its cautious VIP credit
policy will remain intact for 1H of 2012, but intends to loosen this policy in
2H2012. In terms of the overall gaming market for 2011, MBS had a slight edge with
a 51% share but with RWS managed to garner a stronger 47% share of the VIP
segment vs 43% in 3Q11.
Tweaking down FY12 earnings, EBITDA. Factoring in higher pre-operating
expenses for its Western Zone, which is only scheduled to be fully completed by
4Q2012 and a slightly slower VIP rolling chip volume growth of 6% vs 8%, we are
nudging down our FY12 earnings and EBITDA by 8.9% and 5.2% respectively.
Conference call highlights:
- Maximizing slot capacity by early Feb 2012. The group has maximized the number of slots and ETGs to 2,500 by early Feb 2012, thus providing a slight sequential upside in mass market gaming revenue, although the number of gaming tables will remain largely unchanged at 560. The number of slots and ETGs totaled 2,051 as at end-4Q1.
- Higher end hotel offerings on track for full opening by 2H2012. RWS recently completed the construction of 172 rooms at the new Aquarius Hotel and 17 high-end beach villas, with 29 highend Equarius hotel rooms coming on stream by 2Q12. However, the group expects to start marketing the high-end rooms more aggressively from 2H2012 onwards once all 200 rooms are completed.
- Plans perpetual capital securities. The group has announced plans to issue capital securities which Moody’s and Fitch have accorded a Baa1 and A- rating, the highest for any gaming company in the world. This is an indication of the group’s intention to make further casino acquisitions globally as the completion of all developments at RWS by end-2012 will free up more resources for future expansion. The group is currently sitting on net cash of SGD142m, and an estimated free cash flow of SGD800m a year.
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