Monday, June 30, 2008

Genting Bhd/Resorts ... June 2008

Its Prospects

Genting Bhd and its 48%-owned associate Resorts World Bhd seem to have fallen out favour amid worries that the tough operating environment would put the group’s profitability to the test.

Concerns on earnings growth is heightening given that Genting’s international business, which was initially expected to boost its earnings, does not fare well.

Besides concerns on a slowdown in visitor arrival to the hilltop casino, Resorts World’s minimal dividend payment has kept a lid on its share price.

Investors were getting “impatient with the low-payout strategy and were beginning to accord less value to its cash reserves”. Resorts World is hoarding too much cash for too long. Unless there are alternative plans, investors would prefer management to start raising dividend significantly.

Resorts World’s management did make efforts to pay a higher dividend, however, the payout as a percentage of net profit has not progressed much. In the last few years, its dividend payout has been hovering just above the 30% level, translating into a dividend yield of just over 2%, a level considered miserable given Resorts World’s cash flow generating ability.

Resorts World’s cash pile is expected to balloon to more than RM4 billion by year-end (2007) after it sold its equity interest in Star Cruises Ltd and Genting International Ltd.

In addition, the windfall tax that was slapped on independent power producers recently triggered concern that the gaming industry might have to contend with higher tax as the federal government looked for ways to expand its coffers.

The high foreign shareholding placed the share price performance of Genting and Resorts World at the mercy of the foreign managers, who had unloaded their investments on Bursa Malaysia recently due to political uncertainties and inflationary fears.

Furthermore, the valuations of the global gaming stocks were hit by competition concerns as more casinos were sprouting and tighter regulations such as the ban on smoking in casinos in the UK.

Thus, foreign institutional investors were reluctant to pay the hefty premium, which Genting and Resorts World used to command previously.

Its upcoming integrated resort in Singapore is said to be plagued by costlier building materials, besides more expensive labour due to inflation. The value of the project, initially estimated at S$5.2 billion (RM12.4 billion) was revised to S$6 billion after the decision to add six new attractions to the resort, and to make contingency provisions.

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