Thursday, December 10, 2009
Why I Like Genting Malaysia & Genting Berhad (pls stop laughing)
One must be able to separate an issue from the overall scope of things. Many readers would assume that I have an axe to grind with the Genting group - well, no is the answer. Yes, I have issues about their board's independence, but business fundamentals are another thing.
You would have noticed that since my recommendation of CIMB (@ 10.30), I have not touched on any large caps for the longest time. My rationale is simple, without sufficient liquidity the large caps will find it hard to move. Why then the need to look at Genting Malaysia and Genting Berhad?
Pick up any research report and their target price for both counters are at least 20% above their current prices. Yes, they have been recommending buys on both for the longest time. Opportunity cost people, opportunity cost. Call it a timing strategy, but the bones in me indicate that both counters are likely to outperform over the next 3-6 months substantially.
Ticker: GENM MK
Shares Issued (m): 5,904.4
Market Cap (RM m): 16,768.4
Genting Bhd owns 48.65%
RNAV valuation (RMm)
Gaming operations DCF (3% TGR, 11% WACC) 13,618.1
Net cash as at 31 Dec ‘09 5,112.4
Star Cruises market value at USD0.24/share 1,174.6
Wisma Genting and Segambut property 284.1
No. of shares 5,940.1
Target Price 3.40
Ticker GENT MK
Share Capital (m) 3704.77
Market Cap (RMm) 26229.79
Kien Huat Realty 32.21%
Harbor Capital Advisors 3.56%
Tinehay Holdings 3.29%
Genting Bhd’s SOP table RNAV (RM)
Genting Malaysia 10,394.9
Genting Plantations 2,726.9
Genting Singapore 14,626.0
Book value of listed assets 2,386.8
Excess from listed assets 25,361.0
NPV of Other Assets Management fees 2,860.8
Genting Sanyen Power 1,627.0
Oil and gas 647.3
Wisma Genting 240.0
Book value of other assets 1,800.0
Excess from other assets 3,575.0
FY09E company book value 7,174.4
Net Asset Value (RMm) 36,110.4
Total no. of shares (m) 3,703.8
NAV per share (RM) 9.70
Target price (RM/share) 9.70
Source: Company, CIMB Research
I have just taken research samples from the two better local research outfits. Nobody talks about "growth", they harp on RNAV, so much so that both have set the RNAV as their target prices. Isn't that strange? Coincidence? Well, probably not so. Both are expecting some significant corporate exercise in the works.
a) If we look at the group's strategy, they are making Genting Berhad as the holding company. Like it or not, much of the family's wealth is tied up in Genting Berhad and to a much lesser extent effectively at both Genting Singapore and Genting Malaysia.
b) The payback period for Genting Singapore will be out there somewhere, a pretty long time away despite looking to be good long term assets.
c) If they will be using Genting Berhad as the holding company, it will be the main M&A vehicle going forward.
d) That being the case, the ammunition power should reside in Genting Berhad.
e) That means Genting Malaysia is holding about RM5bn too much money for all intents and purposes.
f) Genting Malaysia is being remodeled into a dividend stock as Resorts World is a cash generating cow but there is little to expand in Malaysia. I mean, seriously, any more add ons to Genting Highlands will result in serious soil erosion. By leaving Genting Malaysia having just Resorts World, it alienates the risk of that "casino license" being revoked in the future, should that occur. Nobody can totally rule out that risk. Do we know how local politics will play out in 2 years time, what about 5 years or 10 years down the road? By making it a dividend stock, it is facing the reality that there is no growth for that company except organic growth.
g) Following that masterplan, you would want to take out the RM5bn. Genting Malaysia has 5.9bn shares. That works out to RM0.86 per share. A RM0.50 special dividend would tie in nicely with the celebration of the opening of Resorts World Sentosa. A RM0.50 special dividend would send Genting Malaysia rocketing past RM3.00. That surge will put Genting Berhad's into positive territory as well because it will receive RM1.416bn cash. Genting Berhad has about RM1.01 cash per share as it is, or RM3.737bn cash. Added together, that will come to RM5.153bn or RM1.39 cash per share. Of course, they could in the end decide not to do anything with the cash in Genting Malaysia - but chances are they will do something with the cash soon. There is always the concern that Genting Malaysia may not want to issue a special dividend as the family does not control majority of the stock - that's a pretty naive way to run a listed company because these companies are so big now that its virtually impossible to own a majority of the shares. The companies only got so big because of the way they tap capital.
h) Some have been speculating that Genting Berhad should be getting out of plantations, oil & gas and their power business. That would make sense if they want to extract more cash from Genting Malaysia by selling "yielding assets". In that argument, the power plant business could be sold in another RPT back to Genting Malaysia.
As I have said, Genting Berhad is likely to be its holding company, which should means that most of the mentioned assets will stay in the books. While I have always argued that companies should be focused rather than look like a conglomerate - in Genting group's case, they have relatively "pure vehicles" already in Genting Singapore and Genting Malaysia.
I know all this looks more like guesswork but I am willing to place my chips on the table in anticipation of the January 2010 soft opening for Resorts World Sentosa. There is also the likelihood of a likely "euphoric reassessment" of Genting Singapore when that happens. You know how traditional Chinese business people like to make "good things" happening all at once!!! Even if nothing happens, it is not going to cost me much to square off a few months later.
p/s photo: Noon Wongsawan
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