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Fitch Affirms Genting Berhad, Genting Singapore at 'A-'/Stable
June 29, 2017 / 4:50 AM / 6 months ago

Fitch Affirms Genting Berhad, Genting Singapore at 'A-'/Stable

(The following statement was released by the rating agency) SINGAPORE, June 29 (Fitch) Fitch Ratings has affirmed Malaysia-based gaming conglomerate Genting Berhad's (Genting) Long-Term Foreign-Currency Issuer Default Rating (IDR) and senior unsecured rating at 'A-'. Fitch has also affirmed the Long-Term Foreign-Currency IDRs on Genting's 52.8%-owned subsidiary, Genting Singapore PLC (GENS), and Genting's wholly owned subsidiary, Genting Overseas Holdings Limited (GOHL), at 'A-'. The Outlooks for Genting, GENS and GOHL are Stable. A complete list of rating actions is at the end of this commentary. Genting's ratings reflect its monopoly position in gaming in Malaysia and robust market share of around 35% in the duopolistic Singapore market. Its leisure and hospitality (L&H) business in these countries together accounts for over 80% of consolidated EBITDA. The gaming industry in both these countries is subject to close regulatory oversight, and the resultant barriers to entry impart a degree of stability to Genting's cash flows across the business cycle. It also enjoys some diversification benefits from L&H assets in the UK, the US and the Bahamas as well as businesses such as oil-palm plantations, power, property and oil and gas. In addition to a robust operating profile, Genting has a relatively conservative capital structure. KEY RATING DRIVERS Margins Rebound at GENS: GENS, which contributed around 40% of Genting's consolidated 2016 EBITDA, saw improved margins in 2016, which helped to significantly offset the impact of weaker revenue. While GENS' revenue fell 7% in 2016 as the Asia-Pacific gaming market remained challenging, operating EBITDA margin (excluding a one-off tax refund benefit in 2015) improved due to tighter credit policies, leading to lower impairment of receivables, and a remodelled commission structure, in addition to an overall cost management focus. GENS' sustained focus has resulted in margins improving further in 1Q17. A sustained increase in visitor arrivals in Singapore (1Q17: 4% yoy growth, 2016: 8%) also bodes well for GENS as it focuses on growing its regional premium mass business and reinvests in its facilities. In addition to weak market conditions over the last few years, GENS has been impacted by the loss of market share to sole rival Marina Bay Sands Pte. Ltd. (MBS, BBB-/Stable) due to MBS' locational advantage given its proximity to Singapore's central business district. While risk from further market share loss to MBS remains, we expect GENS' revenue to be supported by higher visitor arrivals and signs of bottoming out in the overall regional gaming market. We believe the competitive landscape in Singapore is unlikely to change in the near term as additional licenses are improbable when the moratorium on such licenses expire in 2017 given the government's concerns over problem gambling. Additionally, while we believe that GENS, and the market in the region generally, is closing in on a recovery, returns on investment in a new casino in Singapore could be inadequate due to increased regional competition. Robust Outlook for Other Businesses: We expect earnings to grow at the Malaysian L&H and oil-palm plantation businesses, which together contributed around 50% of Genting's consolidated EBITDA in 2016. Resorts World Genting (RWG) has opened several new facilities as part of its 10-year, MYR10 billion redevelopment masterplan launched in 2013, and other key attractions such as a new theme park and the remaining floors of its new mall and casino are scheduled to open progressively from 2017. We expect these developments to result in a sustained increase in visitor arrivals over the next three years, from 20 million in 2016, and drive revenue growth for Genting's L&H business. The plantation business should benefit from a rebound in the yield on fresh fruit bunches (FFB) in 2017 due to improved weather conditions. Over the longer term, earnings should be supported by a sustained improvement in yields as its Indonesian oil-palm acreage matures as well as healthy palm-oil prices, in our view. Capex Likely to Increase: We estimate Genting's consolidated capex will increase over the next three years and average about twice of the MYR4.5 billion spent in 2016. Genting is investing in the Resorts World Las Vegas (RWLV) project and expects full-scale construction to commence from 3Q17 with an opening targeted for 2020. That is in addition to its further investment in RWG as part of its redevelopment plan, for which around MYR4 billion has been spent up to 2016. Our capex estimates do not factor in potential investment by GENS in Japan, given significant uncertainties. Capital Structure to Remain Conservative: Genting was in a net cash position as of end-2016, which we estimate will turn into a net debt position in the next three years due to higher capex. However, we estimate that leverage will still be relatively low with the ratio of net adjusted debt to operating EBITDAR less net income attributable to minorities at around 0.6x by 2019. The group's management has a track record of prudent capital management, recently evidenced by GENS' sale of its stake in a South Korean venture to bolster its cash reserves. Our estimates factor in likely equity inflows from the exercise of Genting's warrants, which expire in December 2018, as the exercise price is substantially lower than the current price. Rating Equalisation: The ratings of GENS and GOHL are equalised with that of the parent, Genting, due to strong operational and strategic ties, in line with Fitch's Parent and Subsidiary Rating Linkage criteria. Genting holds 52.8% of GENS through its 100% shareholding in GOHL. Fitch assesses GENS' standalone rating at 'BBB', despite its healthy operating profile and net cash position, due primarily to concentration risk given its single property in Singapore. DERIVATION SUMMARY Genting's ratings can be compared with that of Las Vegas Sands Corp (LVS, BBB-/Stable) and Crown Resorts Limited (Crown, BBB/Stable). While LVS is significantly larger than Genting in terms of both revenue and EBITDA with well-performing assets spread across the US, Macau and Singapore, it is still completely exposed to the L&H business and has a substantially higher leverage than Genting. Crown is smaller than Genting and revenue is concentrated as all its properties are in Australia. Similar to LVS, Crown operates only in the L&H sector and has higher leverage than Genting. These factors justify a higher rating for Genting than LVS and Crown. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: - Consolidated revenue growth for Genting of around 7% each year over 2017-19 (2016: 2%) - Operating EBITDA margin of 35%-36% over 2017-19 (2016: 32%) - Annual capex of around MYR8 billion on average over 2017-19. - Dividend pay-outs, including to minority interests, of around MYR1.6 billion on average over 2017-19. - Equity infusion of around MYR6 billion over 2017-18 through exercise of warrants. RATING SENSITIVITIES Genting Future developments that may, individually or collectively, lead to negative rating action include: - Net financial leverage (as measured by the ratio of net adjusted debt to operating EBITDAR less net income attributable to minorities) being sustained at more than 1.0x. - Weakening of competitive position due to regulatory action in any of the markets in which Genting operates. Upside potential to the ratings is limited by the discretionary nature of gaming expenditure incurred by gaming patrons and the cyclicality and capital intensity of the gaming business. GENS Any weakening of operational and strategic ties between GENS and Genting will result in GENS' rating being notched down from its parent's rating. If there is a downgrade of Genting's rating, GENS' rating will be downgraded accordingly. GOHL Any weakening of operational and strategic ties between GOHL and Genting will result in GOHL's rating being notched down from its parent's rating. If there is a downgrade of Genting's rating, GOHL's rating will be downgraded accordingly. LIQUIDITY Very Comfortable Liquidity: Genting was in a net cash position as of 31 March 2017, with reported cash and cash equivalents of around MYR34 billion compared with debt, including GENS' perpetual capital securities, of around MYR32 billion. Of the total debt, around MYR10 billion is due within 12 months, including the perpetual capital securities which are scheduled to be redeemed in September-October 2017. GENS was also in a net cash position as of 31 March 2017, with reported cash and cash equivalents of SGD5.6 billion and debt, including perpetual capital securities, of SGD3.4 billion. FULL LIST OF RATING ACTIONS Genting Berhad Long-Term Foreign-Currency IDR affirmed at 'A-'; Outlook Stable Senior unsecured rating affirmed at 'A-' Genting Singapore PLC Long-Term Foreign-Currency IDR affirmed at 'A-'; Outlook Stable Long-Term Local-Currency IDR affirmed at 'A-'; Outlook Stable Rating on GENS's SGD2.3bn perpetual capital securities affirmed at 'BBB' Genting Overseas Holdings Limited Long-Term Foreign-Currency IDR affirmed at 'A-'; Outlook Stable Senior unsecured rating affirmed at 'A-' GOHL Capital Limited Rating on USD1bn 4.25% notes guaranteed by GOHL and due in 2027 affirmed at 'A-' Contact: Primary Analyst Akash Gupta Associate Director +65 67967242 Fitch Ratings Singapore Pte Ltd One Raffles Quay South Tower #22-11 Singapore 048583 Secondary Analyst Hasira De Silva Director +65 6796 7240 Committee Chairperson Vicky Melbourne Senior Director +61 2 8256 0325 SUMMARY OF FINANCIAL STATEMENTS ADJUSTMENTS - Equity credit: Fitch has ceased to provide any equity credit to Genting's financials due to GENS' perpetual capital securities from 2016. - Cash: Fitch has assumed 70% of Genting's investment in income funds (2016: MYR1,250mn) and quoted debt securities (2016: MYR342mn) to be readily available cash. Media Relations: Leslie Tan, Singapore, Tel: +65 67 96 7234, Email: Additional information is available on Applicable Criteria Criteria for Rating Non-Financial Corporates (pub. 10 Mar 2017) here Non-Financial Corporates Hybrids Treatment and Notching Criteria (pub. 27 Apr 2017) here Non-Financial Corporates Notching and Recovery Ratings Criteria (pub. 16 Jun 2017) here Parent and Subsidiary Rating Linkage (pub. 31 Aug 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here#solicitation Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. 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