KUALA LUMPUR: The Genting Group inched closer to getting a casino licence in Miami yesterday morning. The bill that could pave the way for up to three casino-resorts in Florida cleared its first legislative hurdle, despite fervent protest from business bigwigs like Walt Disney Co, which operates the flagship Walt Disney World theme park in Florida.
However, the Florida Senate’s favourable 7-3 vote on the bill included a provision that existing rival “pari-mutuels” (referring to the smaller gaming operators) would be allowed to operate as full casinos at the same 10% tax rate as the new mega-resorts, without needing to make additional investments. Amendments made by the state Senate before passing the bill took out a recommendation that would have required pari-mutuels to invest at least US$125 million (RM394 million) to win a casino permit, according to local media reports.
The amendment on the pari-mutuels, “if it remains part of the measure, could serve as a poison pill to doom the bill”, especially in the gambling-averse House of Representatives, where Representative Erik Fresen had said success hinges on there being a net reduction of predatory gaming in Florida,” The Miami Herald reported on Jan 9. “This is the beginning of the discussion,” the bill’s sponsor, Senator Ellyn Bogdanoff, was quoted by Bloomberg as saying.
It is understood that a final copy of the bill will need to be passed by both the Senate and the House of Representatives before it is signed into law or vetoed by the US President.
Over at the Big Apple, however, Genting seems to be powering ahead, having won the support of New York governor Andrew Cuomo for it to be the state’s partner in a planned US$4 billion, 3.8 million sq ft convention centre cum mixed-use development with up to 3,000 hotel rooms next to its “racino” in Aqueduct, Queens. Last week Cuomo recommended that casino-gaming be legalised in New York, a decision that may give Genting a full-fledged casino licence. As it is, Resorts World New York City (RWNY) can only offer electronic table games and video lottery terminals.
Genting is looking to complete Phase 1 or 2.6 million sq ft of the New York convention centre project, dubbed The New York International Convention and Exhibition Centre, by 2014 with the construction of the hotel rooms to commence in November 2015, the Wall Street Journal reported on Jan 6. No breakdown on the cost for the US$4 billion project has been given thus far.
Vincent Khoo, who heads UOB-KayHian Research in Kuala Lumpur, pointed out that it may take at least a year before Genting Malaysia Bhd knows for certain if it will have a casino licence in Miami, even if the lawmakers approve it as the state would need time to call and evaluate proposals. “Although Genting Malaysia can be re-rated significantly on its chances of securing the highly-coveted casino licences, both New York and Miami are unlikely to issue licences in 2012, bearing in mind that 2012 is an election year,” he said.
Still, Khoo calculates that the potential value accretion to equity “could be almost US$1.3 billion”, hypothetically speaking, given that the Miami property commands a 10 times EV/Ebitda (enterprise value over earnings before interest, tax, depreciation and amortisation).
In a note yesterday morning, Khoo wrote that “the potential value creation will be clearly implied by a share price jump”, pointing out that the market capitalisation of Genting Singapore Ltd surged by some S$2 billion (RM4.9 billion) between late-2006 and early-2007, as investors bet on the company clinching the Singapore casino licence.
“However, we have not imputed this potentially sizeable option value into our calculation until more regulatory hurdles are passed in the state of Florida,” Khoo wrote in the note, retaining a “hold” recommendation and RM3.95 target price for Genting Malaysia. “Our entry price is RM3.50 and below,” he told clients. “We expect the share price to remain range-bound given the neutral reactions to the new developments in New York and Miami,” he wrote.
At the current juncture, Khoo prefers parent Genting Bhd to Genting Malaysia. “Genting Bhd is a nearer-term play on the expected good momentum achieved at Resorts World Sentosa (under subsidiary Genting Singapore Plc),” Khoo told The Edge Financial Daily, noting the peak seasonal boost in 4Q2011 and 1Q2012 as well as the potential positive effect of the recently added VIP room capacity. UOB-KayHian has a “buy” call and RM12.24 target price for Genting Bhd, which “ultimately benefits from the group’s foray into the US market”.
TA Investment Management chief investment officer Choo Swee Kee also prefers Genting Bhd, which benefits from having multiple income streams, including that from Singapore. However, Choo is not too positive on the UK operations, under Genting Malaysia, as return on investments is still low at this point.
Choo isn’t overly concerned about the Genting group’s big headline investment numbers in the US, for which specific spending timelines and near-term cash needs have yet to be specified. “At this point, we don’t know whether a cash call is necessary, but it is possible”.
Nonetheless, Choo, whose fund holds Genting Bhd shares, thinks “Genting Bhd is a buy for [future] growth”. “Sometimes when you need to grow, you need to take some risk (and) without which, there would not be growth,” he said, also noting that there “will be value in the [casino] licences”.
In any case, UOB-KayHian’s Khoo pointed out that Genting Malaysia, which generates some RM1.6 billion free cash flow a year, “would be able to secure substantial debt financing at favourable terms”, should additional capital needs arise.
Genting Malaysia traded between RM3.85 and RM3.90 before resting at RM3.88 yesterday, down three sen or 0.77%, while Genting Bhd rose to as high as RM11.16 before closing at its day’s low of RM10.90, down 24 sen or 2.15%.
This article appeared in The Edge Financial Daily, January 11, 2012.
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