Investment Research - Resorts World (HLGeBIZ) - 16-Aug-06
USD68.9m 1H06 net loss
Star Cruises’ 1H06 results swung into a net loss of USD68.9m (1H05: USD10.6m profit), with 2Q06 loss coming in at USD33.9m - almost flat qoq but s sharp reversal from 2Q05’s net profit of USD6.2m.

Dragged by non-cash items
At a glance and ignoring seasonal factors where Q3 is typically strong, results are below street full year profit forecast of USD7.7m and our USD18.7m profit projection. Not to be overly worried, as the loss was dragged down by the impact of non-cash items – 1) USD24.9m foreign currency translation loss on its Euro denominated loan (USD20.9m gain in 1H05) and 2) USD10.3m impairment loss on its low cost carrier investment (USD2.7m loss in 1H05). Qoq mark to market of debt translation loss/gain is not meaningful as the impact may reverse in subsequent quarters, unless there is a perpetual shift in the underlying currency. As for the impairment loss, it will not recur as it has been written down to USD1. Adjusting the non-cash items, overall net operating loss was only USD33.8m (1H05 loss was USD7.6m).

Underlying operation fairly encouraging
What is more crucial is Star Cruises’ underlying operation, which is fairly encouraging, in particular its core NCL-brand division. Key positive operating highlights, on a blended basis (Asia Pacific, North America and others), were:
1) 1H06 net revenue up 20.9% yoy on the back of a 20% expansion in capacity days
2) Occupancy was only marginally lower at 101% vs 104% in 1H05, despite the surge in capacity.
3) Improvement in net revenue yield of 0.7% (also thanks to higher onboard revenue) indicates that pricing power remains good ie. no cutthroat ticket discounting to fill sharply higher capacity
4) 1H06 operating profit was up 2.1% to USD54.6m

Pressure on bottomline were due to:

1) Higher average fuel prices, up 42% yoy, and now accounts for 19.4% of ship operating expenses vs 15.1% in 1H05 (unfortunately this is largely beyond management’s control)
2) Higher debt level at USD2.95bn (required to expand its fleet to grow future earnings – a timing issue in our view) and also higher average cost of debt (a result of rising interest rates)
3) Increase payroll for its US flagged ships (a timing issue again as additional crew were recruited earlier for training for its new US flagged ships. Impact should normalized in subsequent quarters as the new capacity/itinerary roll out)

Conclusion and recommendation
Overall, while we think that the results may lead to a cut in street earnings expectations (we are holding ours unchanged for now), the impact on Resorts World (36% interest in Star Cruises) will unlikely be very significant, in view of the latter’s huge earnings base of RM1,049m (projected for FY06). We continue to rate Resorts World and parent Genting a BUY, with a preference for Genting between the two.

 Resorts World (HLGeBIZ) - 01-Jun-06
1Q06 earnings draged down by Star Cruises & luck factor

 Resorts World (HLGeBIZ) - 23-Feb-06
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