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Monday, May 15, 2006

Genting @ 36.5 cts ( Gaming / Singapore ) 1 comments

Final Poll Results: 3:4

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Main issues

1.Investment holdings should be priced at discount

2.Sentosa IR licence likely being priced in already

Wow what a day. All indices on the Singapore SGX down an average of 3-4%. An indication of the carnage is that for my market summary of small/mid-cap (<$1) stocks (see below), the list of top gainers cannot even fill up to 30 places.

Ironically, the stock I'm covering here is one of those top gainers; Genting rose 0.5 cents, against the receding tide that is leaving all naked swimmers exposed. Yet, is this price strength justified?

Since its IPO, I have been wondering how its ex-extraordinary trailing PE of ~100 can be sustained (Note that fair value gains amounting to >S$100M in FY05 form the majority of these extraordinary gains). Well, I realised that it is primarily an investment holding company, and perhaps it might be unfair to value it on the basis of PE which supposes predominance of a core business that generates dependable recurring revenue and profits. In this case, profit (or losses, as in 1Q05) derive mostly from valuation changes in group investments.

As in my analysis for Capitaland, I'll refer to a Singapore analyst report on Genting which uses an appropriate valuation method: RNAV (Recalculated Net Asset Value): GK Goh's report dated 10 Feb 06. The group's two main investments are stakes in two London LSE-listed gaming companies: a 20% stake in Stanley Leisure and a 30% stake in London Clubs, valued at US$360M based on LSE stock prices in mid-Jan 06. Comparing that to current prices on LSE, I estimate that the total value has gone down to about US$300M (based on 703p for Stanley Leisure and 109p for London Clubs, as compared to 777p and 147.5p respectively in mid-Jan). The report then adds Genting's substantial cash base and other miscellaneous items to derive a core RNAV of S$0.30 per share. Then it estimates the Sentosa RNAV (assuming Genting gets the Sentosa IR licence) at S$0.13 from which it derives the target price of S$0.43.

I have several issues on this pricing. Firstly, my disagreement for pricing of investments. If these two companies were highly prized by market investors (ie. they'd be ready to snatch shares at current market prices), I would agree with valuing them at 100% market capitalisation. But the fact that their market value has declined over these 5 months means --- maybe not. As with closed-end funds, whose market price is typically traded at 10-20% discount to sum of total investment market value, it would be prudent to mark a similar discount to these two investments (the discount is for difficulty in realising the value completely). This, coupled with my abovenoted decline in investment value, could mark a 30% discount to GK Goh's calculated value for these two investments. Secondly, the RNAV assumes Genting winning the Sentosa IR licence (although it assigns a rather generous probability of 75%). Well I am not going to try and guess who will win the Singapore Marina Bay and Sentosa IR licences, but to incorporate the case of Genting winning of one of these licences in the calculation of its fair value seems a bit like counting the chickens before they hatch. Looking at GK Goh's core RNAV of S$0.30 (without the IR) it appears that the market is also anticipating that Genting will win one of the IR licences, given its current share price of S$0.36. In truth, nobody knows how much benefit an IR licence is worth; if GK Goh's calculations for the estimated NPV of the Sentosa IR are based on company (Genting) estimates they might be on the optimistic side. Clearly people buying into Genting are speculating on an IR win for Genting, and that they can sell to the next greater fool who buys in on the euphoria of the IR win.

It is not wise to buy in under such market expectations being priced into the stock. It is similar to traders buying into stocks in December on expectation of the Capricorn effect, or selling them in anticipation of the World Cup effect. If everybody does that, then the reverse effect might happen since all buyers or sellers (respectively) are exhausted before the event itself. If the investor still wants to buy in, he should avail himself of the prospects of Genting in other market opportunities, in particular the Asia-Pacific (especially Macau) and the UK. One should also be aware that given the high PEs of gaming companies, it will be expensive for Genting to expand by buying further stakes (and hence recurring earnings) in other gaming companies; its huge cash base (about $0.14/share) might not seem that great after all.

(1) CIMB GK Goh report 10 Feb 06: Genting International




Anonymous Roger said...

How To Buy Genting Singapore share

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