Tuesday April 16, 2013

Genting valuations still compelling

Analyst Reports


By CIMB Research

Outperform (maintain)

Target price: RM11.40

DESPITE the share price appreciation and outperformance over the last three months, Genting Bhd's valuations remain compelling.

At a financial year ending Dec 31, 2014 enterprise value per earnings before interest, tax, depreciation, and amortisation (EV/EBITDA) of six times, it is still the cheapest gaming conglomerate under our coverage.

We are raising our RNAV-based target price for Genting from RM10.90 to RM11.40 as we increase the discounted cash flow (DCF) valuation of its management fees from RM4.6bil to RM6.2bil.

The discount rate used on the cashflows was previously too high at 15.3%.

We lower it accordingly to 11.2% to reflect the current risk-free rate of 3.4% and market risk premium of 6.4%.

The DCF value now accounts for 15% of Genting's RNAV, in line with its contribution to group earnings. Key catalysts are merger and acquisition (M&A) opportunities and capacity expansion of its various listed gaming units.

We maintain an “outperform” rating.

Genting's management fees from Genting Malaysia Bhd sets it apart from other gaming conglomerates and should be given greater recognition since it is a key contributor to its RNAV and bottomline, not forgetting the fact that it is cash earnings.

This further supports our valuation case and our view that Genting's current 2014 EV/EBITDA discount to the regional average of 9.5 times should not be as high as 37%.

The appeal of Genting's EV/EBITDA valuation is illustrated by the fact that it is trading in the same range as it did in 2003 during the SARS crisis.

Although it is too early to worry about the current bird flu situation, Genting Malaysia's business should prove to be defensive against a SARS-like crisis just as it was in 2003.

During the SARS crisis, its EBITDA remained resilient with EV/EBITDA hitting a low of eight times, which is actually higher than its current multiple.

Genting Malaysia's valuations have de-rated over the years because of diversification into the more mature markets of the UK and the United States.

However, Genting may not be so fortunate this time around since 38% to 42% of its earnings now come from Genting Singapore Plc, which will likely see a higher degree of vulnerability in a SARS-like crisis.

We would like to clarify that the view of diversification from gaming in our last note was our own and not management's.

On closer analysis of cashflows and the balance sheet at the holding company level, there is little risk of Genting ploughing capital into new businesses since most of its available financial resources will be tied up in its Las Vegas and Indonesian energy projects.

Indeed, with the latest Las Vegas deal, the emphasis of the group on gaming is now even greater.

Most of the cashflow resources at the holding company level will now be tied up with the US$2bil Echelon project and the RM4bil of energy investments in Indonesia.

We estimate that based on a 70:30 debt equity ratio on future committed projects, the net cash position at the holding company level will swing to net debt.

Our positive recommendation on Genting is built on the premise that its valuations make it the cheapest gaming conglomerate and are compelling given that it is trading at SARS crisis-like multiples.

However, our valuation argument assumes a “business as usual” scenario. If a SARS-like crisis does unfold, it is unlikely that Genting's valuation will be resilient since Genting Singapore is a key contributor.

We believe that in an environment where valuations are under stress, Genting will likely trade in line with the value of the listed units.

It has historically traded at a premium over the sum of its listed parts before it hit a period where it was at a discount because of the exuberance of Genting Singapore's initial re-rating when Resorts World Sentosa started operations.

It is now currently trading almost in line with the value of its listed units, with no value attributed to its non-listed businesses and DCF valuation of its management fees, which further lends support to our valuation-based recommendation.


By RHB Research

Neutral (maintain)

Target price: RM9.09

WE believe Allianz Malaysia Bhd's share price run-up is justified as it has been trading below its historical mean diluted price-earnings and price per net tangible asset (P/NTA) since 2009.

We still like the company's strong fundamentals and upgrade our target price to RM9.09 from RM8.02 previously, on expectations of more conservative surplus transfers from its non-participating reserves as well as the growth prospects of its life insurance business.

However, we also believe that the stock is now fairly valued. Therefore, we maintain a “neutral” rating on the stock.

Allianz Malaysia's share price has surged by 18% since our last report in February.

We believe the rise is justified given the company's leading market position in general insurance (GI) and exposure to the life insurance (LI) business.

It had been trading at valuations below the sector's average and its historical mean since 2009.

It had been trading below both its mean diluted P/E and P/NTA valuations since 2010, when it issued 192 million irredeemable convertible preference shares (ICPS).

This was partly due to the stock's illiquidity, the lack of catalysts, as well as its uninteresting dividend yields as the company was obliged to pay dividends to holders of its ICPS.

The stock is currently trading slightly above its mean P/NTA (at a current P/NTA of 1.78 times) and its mean P/E (at a current 13.5 times P/E).

We have confidence in Allianz's agents' track record, underwriting profitability as well as its resilience against regulatory risks.

In addition, its new bancassurance business' tie-in with HSBC could provide further upside surprises.

However, based on our analysis, its stock is fairly valued as the share price has caught up to its return on equity (Roe) which is forecast to be 12.8% versus our implied forward P/NTA of 1.60 times.

The high Roe is partly due to the company's ability to transfer non-participating surplus to its shareholders' funds, although our forecasts remain conservative given the company's capital commitments to bancassurance.

Allianz General Insurance Company, the GI arm of Allianz Malaysia, launched its Home Shield product on April 8 to target home owners who are looking for reliable protection for their homes and personal effects.

Insured events may cover theft, fire, lightning or floods.

The affected policyholder will receive an allowance for meals and hotels located anywhere within Malaysia to a maximum of RM1,000 within seven days from the date of loss or an option of Emergency Relief allowance of RM500.

We understand that this is part of a personal accident (PA) product that targets retail customers and hence do not see this as a catalyst for Allianz's premiums growth given its small sum insured.

The targeted customer segment could be a niche, as many homeowners with outstanding housing loans may already have insurance coverage linked to the loan.

We made minor upward adjustments of 1% to 3% to our financial year ending Dec 31, 2013/2014 net profit and diluted earnings per share (EPS) forecasts, as we tweaked our historical numbers following the release of the company's annual audited financials.

We roll over our target price to RM9.09, pegged to a 16 times 12-month forward P/E of its GI business and a price per enterprise value (P/EV) of one time on LI's forward embedded value of RM750mil.


By Kenanga Research

Underperform (maintain)

Target price: RM8.82

SIME Darby Bhd announced that it has acquired the remaining 51% stake in Weifang Wei Gang Dredging Project Co Ltd (WF Dredging) and Weifang Wei Gang Tugboat Services Co. Ltd (WF Tugboat) for a cash consideration of 36.7mil renminbi (RM18.1mil) and 15.3mil renminbi (RM7.5mil), respectively.

Recall that Sime Darby already owned 49% stake in WF Dredging and WF Tugboat.

We gather that WF Dredging is mainly involved in the provision of dredging and marine services, land reclamation works and related businesses while WF Tugboat specialises in the provision of tugboat pilot services and related businesses.

We believe the prices paid for both WF Dredging and WF Tugboat are fair as it reflects the equity portion of the paid up capital for both companies.

Since the paid up capital for WF Dredging is 72 million yuan, 51% stake of the paid up capital works out to be 36.7 million yuan which is the same amount paid by Sime Darby.

This applies to WF Tugboat as well.

We are positive on the deal as increased participation in Weifang port business should strengthen Sime Darby's China Utilities division income in the long term.

Nevertheless, the division's earnings before interest and tax (EBIT) contribution is small at RM12mil or only 0.5% of the Sime Darby group EBIT in the first half of the financial year ending June 30, 2013.

Despite our positive view on the deal, we remain concerned on Sime Darby's plantation division earnings, which contributed RM3.2bil or 54% of the group's EBIT in 2012.

Recall that Sime Darby's 2013 key performance indicators (KPI) of RM3.2bil in net profit is based on an average crude palm oil (CPO) price assumption of RM2,700 per tonne.

As CPO prices in the firs quarter of calendar 2013 have been weak at an average of RM2,324 per tonne, we believe that Sime Darby should miss its 2013 net profit KPI.

Note that we are only expecting a 2013 estimated core net profit of RM3.05bil, which is in line with our assumption of an average CPO price of RM2,500 per tonne for calendar year 2013 estimated.

We maintain 2013 estimated to 2014 estimated core net profit of RM3.05bil and RM3.55bil, with an “underperform” rating.

We also maintain a target price of RM8.82 based on our sum-of-parts valuation. Risks include better-than-expected CPO prices.

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