Dec 11 -
Summary analysis -- Genting Bhd. ---------------------------------- 11-Dec-2012
CREDIT RATING: BBB+/Stable/-- Country: Malaysia
Primary SIC: Hotels and motels
Mult. CUSIP6: 372452
Credit Rating History:
Local currency Foreign currency
16-May-2011 BBB+/-- BBB+/--
19-Dec-2007 BBB/-- BBB/--
The rating on Genting Bhd., a Malaysia-based gaming and leisure group, reflects the group's solid market position, strong cash flows, and "modest" financial risk profile. The risks arising from overseas expansion, earnings concentration in the gaming business, and exposure to evolving regulations partly offsets these strengths.
We view Genting's business risk profile as "satisfactory." The group has a solid market position in gaming and has improved its geographic diversity over the past few years. These factors have strengthened Genting's brand awareness, and boosted other established brands such as "Resorts World," "Maxims," "Crockfords," and "Awana." The Genting group is the second largest gaming company in the world, after Las Vegas Sands Corp. (BB+/Positive/--).
In our view, strong cash flow generation from Genting's gaming business supports the rating, despite the group's earnings concentration in this segment. Genting's gross margin remains the highest among its peers, at more than 45% over the past two years, thanks to the favorable gaming tax regime in Singapore. Resorts World Sentosa (RWS) in Singapore, which currently contributes more than 45% of Genting's group EBITDA, is one of the largest gaming properties in the world in terms of EBITDA generation, even though growth in Singapore's gaming market has slowed materially since two integrated resorts (Marina Bay Sands and RWS itself) opened in early 2010. The group's Malaysian gaming operation, Resorts World Genting, recorded higher revenue year-on-year for the first nine months of 2012 mainly due to an overall increase in volume of business.
The Genting group's financial performance in the first nine months of 2012 was below our expectations. Revenue declined (on a year-on-year basis) in most business segments, particularly the Singapore gaming operations, which were exposed to economic volatility and competitive pressures in the region, given their reliance on international customers. We believe uncertain regulatory policies could constrain gaming market growth in Singapore, and anticipate that net gaming revenue in full-year 2012 will decline by about 5%. Our preliminary expectation for 2013 is that net gaming revenue will grow by 0%-5%.
Our assessment of Genting's financial risk profile reflects our view of the group's conservative financial management and record of controlling leverage while expanding capacity. The group has solid financial strength, due to its strong liquidity and profitability at its leisure and gaming operations. In our base case, we expect Genting's financial performance to remain satisfactory in 2013 supported by more stable gaming industry conditions in the region despite uncertainties in the global economy. We expect revenue to grow by 3%-5% a year in 2013-2015. We anticipate that the group's ratio of gross debt to EBITDA will stay at or below 3.0x in the same period (the ratio was 2.9x on a rolling 12-month basis in the third quarter of 2012, including perpetual securities as debt) and be significantly stronger after netting off surplus cash over the next two years. However, the ratio could deteriorate depending on the group's appetite for growth in the gaming sector.
The rating incorporates our view that Genting could make large-scale investments, through Genting Singapore PLC (GENS; not rated). GENS raised Singapore dollar (S$) 2.3 billion via perpetual subordinated capital securities (PerpS) in March and April 2012. PerpS are subordinated, deferrable securities with no fixed maturity date. In accordance with our criteria on hybrids, we assign minimal equity credit to PerpS, treating them entirely as debt when calculating credit ratios. However, we acknowledge that PerpS have certain equity-like characteristics when interpreting the company's metrics and assessing its financial risk profile.
We assess Genting's liquidity as "strong," as defined in our criteria. We expect the company's sources of liquidity to exceed its uses by at least 1.5x over the next 12 months, and by more than 1.0x over the next 24 months. Our liquidity assessment incorporates the following expectations and assumptions:
-- The group's sources of liquidity include unrestricted cash balances of about Malaysian ringgit (MYR) 18.34 billion and available-for-sale financial assets of about MYR3.06 billion as of Sept. 30, 2012, and funds from operations of more than MYR6.0 billion.
-- Uses of liquidity include capital expenditure, working-capital requirements, debt repayments, and dividend payouts. As of Sept. 30, 2012, the group has MYR2.10 billion in short-term borrowings.
-- Net sources will remain positive and the group will remain in compliance with its financial covenants even if EBITDA declines by 30%.
-- Genting has established and supportive banking relationships. Refinancing risk is manageable, with debt maturities fairly well spread.
GENS' receivables are stabilizing. In our opinion, any significant increase in GENS' receivables adds to the group's credit risk. Receivables increased in 2011 mainly due to credit provided to direct high-rollers to RWS. Such risk could heighten if advances to direct players increase to secure a bigger share of the "VIP" business.
The stable outlook reflects our expectation that Genting will continue to generate strong operating cash flows, and that its free operating cash flows will remain positive. The outlook also incorporates our expectation that Genting will take a prudent approach to further expansion while maintaining strong liquidity.
Execution risk, particularly risk associated with gaming expansion, will limit rating upside for the next few years. Beyond that, we could raise the rating if Genting materially improves its financial performance such that its ratio of total debt to EBITDA is at or lower than 1.5x on a sustained basis. We could also raise the rating if the group further diversifies its revenue sources.
We could lower the rating if Genting's cash flows materially weaken, or the company engages in aggressive debt-funded acquisitions or expansion projects such that its ratio of total debt to EBITDA stays above 2.5x (after considering surplus cash) on a lasting basis, and its strong liquidity position materially diminishes.