Tuesday October 30, 2012
Revaluing Genting group
By GURMEET KAUR
Consolidating gaming interests under one roof deemed more desirable
PETALING JAYA: Given the Genting group's disjointed corporate structure, some analysts reckon it can derive significant value if it embarks on a restructuring of assets currently parked under Genting Bhd, its listed flagship company.
And the key to unlocking this would be the consolidation of the gaming interests under one roof while carving out the non-gaming assets, CIMB Research said in a report yesterday. “The main issue is whether Genting is a global gaming conglomerate or just a diversified conglomerate. Arguably it is the only leisure-based company with such varied interests from plantations to oil and gas. Ownership of its gaming interests are disjointed,” the firm noted.
This, according to CIMB Research, has handicapped Genting's valuations versus other global peers. On an enterprise value (EV)/earnings before interest, taxes, depreciation and amortisation (EBITDA) basis, Genting is trading at 5.1x a significant discount to Las Vegas Sands' 10x, Wynn Resorts' 9.6x and MGM International Resorts' 8.5x based on the current price of RM8.94.
The late Tan Sri Lim Goh Tong's family, via its privately-held Kien Huat Realty, owns 39.6% stake in Genting Bhd, which in turn owns 49.3% stake in Genting Malaysia Bhd (formerly Resorts World), 54.6% in Genting Plantations Bhd and 51.9% in Genting Singapore Plc.
Genting Malaysia also owns a 18.4% stake in Genting Hong Kong while another 55.3% in the latter is held indirectly via the Lim family which also has a 30.3% stake in Landmarks Bhd. (see chart)
CIMB Research theorises that Genting can undertake two distinct restructuring paths going by restructuring proposals undertaken by other diversified gaming companies, with the simplest route being privatising Genting and subsequently re-listing it with only its key leisure assets.
Privatisation will give management a free hand to restructure although that route will involve a mammoth financing exercise.
Recall that in 2010, the (now privatised) Tanjong plc had chosen the path of privatisation with an initial view of spinning off its power and gaming business separately. But the company had eventually sold both businesses.
Other analysts agree on the merits of a restructuring of the Genting group.
Chong Lee Len of Affin Investment Bank said there was little reason to have more than two listed companies on the same stock exchange giving similar exposure. “Investors generally prefer pure plays and they get that via Genting Plantation and Genting Malaysia,” she said, adding that taking Genting Bhd off the market was not a bad idea.
However, she said one main issue with such an exercise, from the standpoint of the major shareholder, would be figuring out how to “narrow or eliminate cash flow leakage”, considering the group's cash cows in the current structure were one level below.
She noted Genting's share price had under-performed the broad market by some 27% to date as both its Singapore and Hong Kong subsidiaries lacked growth trajectory.
In a report dated Oct 8, Chong said the stock traded at a widened 20% discount to the firm's estimated revalued net asset value of RM10.71/share. And this is expected to widen by an additional 3% when the sale of its 75%-interest Genting Sanyen power plant is completed by end-October.
However, Chong was of the opinion that the Genting group's corporate structure was not as complex as other conglomerates like the Berjaya group for instance. She instead believed that Genting's huge cash pile gross cash of RM19.9bil at the Genting level as at June 30, 2012 is putting pressure on management to perform or “make the money work” and that would entail some sort of corporate exercise.
According to CIMB Research, assuming Genting is taken private at 20% premium as in the case of Tanjong, this will imply a share price of RM10.70 or market cap of RM39.7bil. “With the 60% free float, it would require RM23.7bil in financing. And assuming an interest rate of 6%, Genting would need RM1.4bil a year to service the debt.”
To retire the RM23.7bil debt, CIMB Research reckoned that 53% of the new Genting would have to be sold. The final outcome would be favourable for the Lim family who would then have a 47% stake in a new Genting that would be worth RM45bil in market cap compared with 39.6% held currently. In theory that is a net gain of RM5.3bil.
The firm said the alternative to privatisation would be a demerger exercise requiring the injection of Genting Hong Kong into the group. This will bring the Hong Kong operations to the same level as Singapore and Malaysia.
“The non-gaming assets can then be de-merged, similar to an exercise previously set by another Malaysian gaming conglomerate, which subsequently saw a significant re-rating in its valuations,” said the firm.
However, while this is a practical route, it may be a more complicated one. A proposed share swap could work in theory, that is the Lim family could swap its stake in Genting Hong Kong for Genting's stake in Genting Plantations. This appears simple on paper but it could be hard to execute considering the whole host of regulatory issues that may crop up as the two companies are listed in different bourses and have different minority shareholders, according to CIMB Research.
An easier option would be for the Lim family to inject its stake in Genting Hong Kong into Genting for new shares. With its stake valued at US$1.3bil, injecting the former into Genting would increase its shareholding from 39.6% to 46.3%, assuming 463 million new shares are issued at the current share price of RM8.90. But the one question that would arise from this is what would happen to Genting Malaysia's 18.4% stake in its Hong Kong subsidiary?
“Ideally, for the new corporate structure to be fully streamlined, we believe it would be best if the stake was gradually divested into the open market via share placements or made available in an offer for sale or distributed to Genting Malaysia's shareholders, in which case Genting's stake in Genting Hong Kong will increase to 64.4%,” said CIMB.