Genting bets on new markets

The firm has cash and cash equivalent of us$ 3.83 billion as at December 31, 2011 (FY11) with us$ 612.9 million in bank balances and deposits while the balance of us$ 419.4 million in money market instruments. It is also able to generate more than us$ 161.3 million in free cash flow every year.

Genting Singapore, 52% owned by Genting, plans to sell us$ 397mil in perpetual subordinated capital securities, a hybrid of bonds and equities, to mostly retail investors. Just last month, Genting Singapore raised us$ 1.43 billion from perpetual securities that was sold mainly to institutional and private-banking investors.

Genting Singapore CFO Lee Shi Ruh says the proceeds from the perpetual subordinated capital securities issue would be used by Genting Singapore for the company's “expansion and ventures into new acquisitions or greenfield projects”. “Should the opportunities arise, Japan and Korea are the options we can look at. The funds raised will put us in a strong position for potential overseas investments,” she says in an email reply to StarBizWeek.

When asked on the price of the us$ 1.43 billion perpetuals solds to institutional investors that has been edging down, Lee says as with other types of securities, the price of the perpetual securities would fluctuate in short-term as interest rates move and market conditions change. “However, investors of the perpetual securities tend to be long-term holders who value the stability of the interest income over the long-term”.

Analysts are not surprised that Genting was looking to put its money in Japan or South Korea as the gaming company had indicated its plans to grow its core business overseas despite a setback from its venture in Miami in January. Genting group has indicated its appetite for future casino development amounting to some us$ 3.9 billion in the immediate to medium term.

“Japan is mulling over liberalising the casino industry for a while but regulatory risk with regards to casino licencing will continue to hinder Genting's plan to penetrate into the country,” an analyst, says, adding that Genting would be more cautious in its approach after the setback of its Miami venture when the state legislature pulled a vote to liberalise gambling activities in Florida.

He believes Genting group would be able to hold its own and bid for casino projects if it materialised in Japan or South Korea due to its track record in Singapore, Malaysia and the Philippines.

Some analysts, however, remain cautious on Genting's venture into east Asia due to the regulatory issues in Japan and South Korea. “Yes, we are cautious but we are also optimistic with Genting's expansion plan into Japan and South Korea. Its a huge market to tap,” an analyst says.

A local bank-backed analyst says several markets including Japan had been looking to liberalise their gaming industry but timing remained uncertain. He says Genting was not the only gaming operator interested in the Japan market, Las Vegas Sands  had also expressed its interest to expand there.

He says proper legislation and the right-sized market were among the factors considered by casino operators. Casino operators will only be attracted to invest if the markets offered an open access to locals and foreigners, excellent location and easy accessibility, and attractive tax rates, he adds.

Genting Singapore's Lee reportedly says the potential liberalisation of Japan and South Korea's gaming industries could be similar to Singapore's decision, which legalised casinos in 2005. The two integrated casino resorts in Singapore have helped boost its tourism industry.

Currently, a group of lawmakers in Japan are pushing for a bill that could legalise casinos in the country. In South Korea, only one of its casinos is open to citizens and it is located in a rural area far from major cities. It has been reported earlier that South Korea was planning for a new casino-resort near Incheon International Airport to attract Chinese and other Asian tourists.

Genting, which was founded in 1965, has been on an expansion mode. It has more than 26 years of experience in operating casinos and integrated resorts in the United States, Asia, Australia and the United Kingdom. The group is the largest casino operator in the United Kingdom, with over 40 venues. Genting entered the UK casino market in 1976.

Indeed, Genting's financial results has shown a lot of improvement after growing its business overseas.

Genting Bhd's net profit for financial year 2011 rose 30.1% to us$ 922.7 million from us$ 709.7 million a year earlier on the back of a 28.7% increase in revenue to us$ 6.3 billion. “We believe that including land cost, an integrated resort-cum-casino project in Japan could cost more than us$ 8 billion,” AmResearch analyst Gan Huey Ling says in a recent report.

She adds that Marina Bay Sands cost an estimated us$ 5.5billion to develop, while Resorts World Sentosa would cost about us$ 5.8 billion after the Western Zone is completed. As at end-financial year 2011, Genting Singapore has a gross borrowings of us$ 2.55 billion and cash of us$ 2.71 billion. The group's operating cashflow was us$ 1.11 billion in 2011 while free cash flows were us$ 98.5 million.

A local analyst believes that the additional debt burden of us$ 399.7 million was highly manageable as Resorts World at Sentosa (RWS) itself generates an operating cash flow of more than us$ 799.5 million annually. The analyst is not surprised by the second issuance as the Genting group had previously indicated its appetite for future casino development amounting to some us$ 3.99 billion in the immediate to medium term.

Citi Investment Research says the newly issued perpetual securities would be accounted for as equity, same as the us$ 1.43 billion issuance that was done in mid-March. “The annual distribution to the new perpetual security holders is estimated to further reduce profit attributable to common shareholders by about us$ 28.7 million (assuming the us$ 159.9 million green shoe option is exercised). More importantly, we believe that Genting Singapore cannot pay common shareholders any dividends before they satisfy the distributions payable to the perpetual holders,” it says.

CIMB Research reckons that this second round of issuance, coming hot on the heels of the recent us$ 1.43 billion offering in February, was to satisfy retail demand (the us$ 799.5 denomination was considerably less than the first offering's us$ 199,880).

“The purpose of the fund-raising remains the same to gear up for Genting Singapore's business expansion, among others. “Higher interest costs from the additional us$ 399,7 million issuance will lower our financial year ending Dec 31, 2012 (FY12) to financial year 2014 earnings by an estimated 1% to 2%. Including this us$ 399.7 million, Genting Singapore will have us$ 1.83 billion of fresh funds for opportunistic ventures and acquisitions.”

It says the management of Genting Singapore had indicated, during its fourth quarter 2011 results conference call, that equity commitments to future ventures could be anything from us$ 399.7 million to us$ 319.8 million. A third of debt-equity funding would put the size of investment opportunities at us$ 5.59 billion, says CIMB Research.

Apart from investing in east Asia, analysts say the extra cash in Genting's war chest would be good for the group as it could take advantage of suppressed asset valuations amid current economic jittery in the United States and Europe. Some analysts are also speculating that Genting may be looking to invest in its second integrated gaming and resort complex in Vietnam.

With a cash pile of more than us$ 4.1 billion and a fund of us$ 1.43 million raised earlier, Genting group will continue to be under the watchful eyes of investors as to where the group is going to put its money.