Genting Singapore PLC (Time to buy?)

In recent times, Genting Singapore PLC has been in the news for all the wrong reasons.

Genting Singapore is flirting with its 52-week low. Are things turning around? (read here)
Genting Singapore Q1 net profit plunges 73% (read here)
Weakness in premium player segment hits Genting Singapore’s Q1 earnings (read here)

To be frank, I have never been a big fan of Genting stocks. It has all the making of a speculative penny stock. A gambling business that seems to attract punters.

Nevertheless, there has been much news about it due to:
a) The plunge in its share prices. Genting stock prices are near 52 weeks low. The stock price on 19 June 2015 is $0.9350. This is just a tad higher than its 52-week low of S$0.915.

b) Share buy backs (as mentioned in my earlier post, Genting has been in the news for its substantial share buy backs). In the first quarter of this year, Genting spent about $37.3 million buying back its own shares at prices ranging from 91 cents to $1.02. In fact, Genting has been actively repurchasing its share since Nov last year (read here).

Genting has commenced on share buy backs starting from 2 June 2015, under the program mandated by the shareholders in the Annual General Meeting held on 21 April 2015. As per the mandate, the company is authorized to repurchase up to 1,206,968,389 shares, representing 10% of the issued ordinary share capital.

Being the ever opportunist, all these have piqued my Interest. Let’s keep an open mind.

When I study the financials of Genting, 4 items caught my attention:

1) Cash rich and low debt. It has cash holding of SGD$5.26B, and debt of only SGD$1.71B (read here and here)

2) It has improving free cash flow (well at least till Dec 2014).

3) Another item worth mentioning is that price to book is only 1.15 (the company has an average PB ratio of 2.7 over the past five years).

4) Enterprise Value/EBITDA is 5.81. As a rule of thumb, any EV/EBITDA below 10 is the sign of a good value.

Despite the 4 key points highlighted earlier, others not so good statistics also caught my attention:

Market Cap is SGD$11.28B, while Enterprise Value is only SGD$7.75B.
P/E Ratio 22.18 (relatively high). However, to note: In the last five years, the shares have been valued as much as 50 times earnings.
PEG Ratio (5 yr expected) is 1.65 (more than 1, which is not good).
Current Ratio is 5.43. Acceptable current ratios vary from industry to industry and are generally between 1.5 and 3 for healthy businesses.
Return on Equity is painfully low at 4.78%.
Current dividend yield is only 1.07. Not a high yield stock. Prompting an investor (during the recent AGM) to question the management’s decision in spending $170 million in share buyback in 2014 while dishing out a paltry one cent a share dividend to shareholders. (read here) And to add fuel to fire, stock prices keep plunging.
Genting Singapore’s net profit to plunged 73 per cent from a year ago to $62.7 million for the first quarter, while revenues fell 23 per cent to $639.2 million.

Nevertheless, despite these numbers, the main factor causing the price drops seem to be the macro factors or policies, namely the cracking down of corruption by the Chinese government. According to reports, this has resulted in a sharp drop in the gaming volume of casinos around the region. Another would be the issue / difficulty with the collection of debt from the VIP players (bad debts accumulating).

Pertaining to this crack down by the Chinese government, I am reading mixed commentaries on this. On one hand, there are news stating that the crack down will affect casinos around the region, while there are also news saying that the crack down scares many away from Macau while benefiting other casinos in the region (including Singapore).

China to crack down on foreign casinos seeking Chinese gamblers (read here)
Singapore casinos discover there’s no escaping the effects of China’s corruption crackdown (read here)
Macau Crackdown Brings Windfall for Casinos From South Korea to Cambodia (read here)
Cambodian casinos look to win from China anti-graft crackdown (read here)

In the case of Genting, the plunge in earnings is also partly because visitors to Singapore from mainland China plummeted in 2014, down 25.7% in the first 11 months of the year. Chinese tourist arrivals were hurt by the country’s tourism law and a preference for North East Asia instead of South East Asia by Chinese tourists – Cambodia being the exception (good for Nagacorp). (read here and here).

To digress a bit, let’s look at another casino operator (Nagacorp) which is operating in Cambodia: On surface, this does not seem to affect Nagacorp – the largest hotel, gaming and leisure operator in Cambodia (read here and here). Of course the reports did mention that “regional competition to attract Chinese junkets, who demand ever-higher commission fees to bring in clients, could cut into profits”. I have previously written a post on Nagacorp. (read here)

Nagacorp, the Hong Kong stock exchange-listed parent of NagaWorld, said in an unaudited report released yesterday that gross gaming revenue rose to $113.5 million in 2015’s first quarter from $76.9 million in the corresponding period last year.

Consequently, the share prices of Nagacorp did not witness a sharp plunge as compared to Genting.

Anyway back to Genting, I have already stated that the PEG is 1.65. It is near impossible to calculate Genting’s Intrinsic Value, because I can’t find a positive 5 years CAGR on earning per share.

A quick look in ft.com reveals nothing. When I checked in POEMS 2.0, Growth rate % for EPS 3 years is -20.23.

In summary, Genting does not possess a pristine financial fundamental despite its high cash to debt ratio and improving free cash flow.

It does not generate a lot of return on equity (painfully low at 4.78%). It lacks growth, or rather foreseeable growth. In gist: Poor historical track record and negative future prospects.

It is near impossible to judge the future growth of this company due to 2 factors.

Firstly, the lack of historical data such as 5 yrs CAGR of EPS makes it difficult to forecast. Eg. No numbers to substantiate.

Secondly, the poor narrative outlook of the industry due to the Chinese Government crackdown on gambling and the drop in Chinese tourist arrivals in Singapore which do not seem to be changing anytime soon.

The recent investments in Genting Hotel Jurong which recently opened and Resorts World Jeju (RWJ) which will open progressively from 2017 and is expected to be completed by 2019, are big ticket items. These investments will take many years before one can truly gauge if these are indeed profitable.

So despite the sharp plunge in its share prices, I would be hesitant in buying any of its stocks.