Published on 20 Aug 2019.
RAM Ratings has reaffirmed Genting Berhad’s (Genting or the Group) global corporate credit ratings (CCR) of gA2/Stable/gP1 as well as its respective ASEAN and national CCR of seaAAA/Stable/seaP1 and AAA/Stable/P1. Concurrently, we have reaffirmed the AAA(s)/Stable ratings of the RM2.0 bil MTN Programme (2012/2032) and RM1.60 bil MTN Programme (2009/2024) issued by the Group’s wholly owned subsidiaries, Genting Capital Berhad and GB Services Berhad, respectively. The debt programmes are backed by full, unconditional and irrevocable corporate guarantees from Genting.
“The reaffirmation is premised on our expectation that Genting’s credit metrics will remain supportive of its ratings, despite narrowing margins and a rising debt level that will weaken its financial profile,” explains Thong Mun Wai, RAM’s head of Corporate Ratings. Effective 1 January 2019, the Group’s Malaysian operations will be subject to a 10 percentage point increase in duties, rising up to 35% of its gross gaming revenue. While the heavier taxes will substantially erode the margins of Resorts World Genting (RWG), the overall impact on the Group is deemed manageable, buffered by its diversified operations. RWG is also anticipated to improve its competitive edge after the completion of its major redevelopment project, i.e. the Genting Integrated Tourism Plan (GITP), this year.
Genting is projected to incur about RM24 bil of capex between fiscal 2019 and 2021. The bulk of this will be for the construction of Resorts World Las Vegas (RWLV) and the expansion of Singapore-based Resorts World Sentosa (RWS). The latter will undergo a five-year, SGD4.5 bil (about RM13.8 bil) redevelopment and expansion programme, slated to start next year. In return, the Singaporean government will allow additional gaming areas and extend the exclusivity period until 2030. The capex for the expansion of RWS is envisaged to be ramped up in 2021, as the development of RWLV wraps up.
Given its hefty capex requirements, Genting’s debt level is expected to surge (end-December 2018: RM29.28 bil), pushing its net gearing ratio (including money-market investments) up to about 0.20 times by end-December 2021 (end-December 2018: net cash position). At the same time, the Group’s funds from operations (FFO) debt cover on a net debt basis (taking into account its sizeable cash coffers and liquid instruments) remains supportive of its ratings; this is estimated to come up to about 0.6 times. Meanwhile, Genting Malaysia Berhad (GenM), a 49.5% listed subsidiary of the Group, has proposed to acquire US-based loss-making Empire Resorts, Inc. (Empire Resorts) from Kien Huat Realty III Limited (KH). KH is a party related to Genting by virtue of shared ultimate major shareholders. Although the potential impact of the acquisition on Genting is not substantial, GenM could face a weakening in its credit strength (for more information, please refer to the press release dated 20 August 2019).
In FY Dec 2018, Genting’s top line was lifted 4.1% to RM20.85 bil while its operating profit before depreciation, interest and tax (OPBDIT) spiked up 27.7% to RM7.40 bil, supported by the better showing of RWG and RWS, as well as the power and oil and gas (O&G) segments. By contrast, the Group’s bottom line sank 20.7% to RM3.42 bil, weighed down by a hefty RM1.83 bil impairment on its investment in promissory notes issued by the Mashpee Wampanoag tribe in the US. Looking ahead, we envisage Genting’s top line to trend upwards, supported by greater visitor numbers for RWG and Resorts World Casino New York City (RWNYC) and the opening of RWLV in 2021. That said, we expect the Group’s OPBDIT to decline this year as its margins will be eroded by higher Malaysian gaming taxes, before picking up next year. We also remain mindful of RWLV’s heavy start-up costs and lengthy gestation period that could weigh on the Group’s earnings.
Notably, the ratings remain underpinned by Genting’s strong business positions in the Malaysian, Singaporean and British gaming markets. Backed by RWG’s monopolistic position in Malaysia and RWS’s strong foothold in Singapore’s duopolistic gaming market, the Group’s operating margins compare well against those of its peers. Genting is also among the UK’s leading casino operators and the highest-grossing operator of video gaming machines in Northeastern US – although these operations fetch much thinner operating margins. Elsewhere its operations in the Bahamas are still in the red, albeit improving, amid low business volumes.
On the other hand, the ratings are moderated by Genting’s aggressive expansion strategy, execution and market risks, and regulatory risk. Besides its substantial capex for the development of RWLV, Genting will also embark on a five-year redevelopment exercise for RWS. The Group is also keen to bid for a casino licence in Japan. Any cost overrun will heighten the already considerable demand on Genting’s resources; setbacks in the scheduled opening dates of projects will hold up the improvement of its financial profile. Moreover, the Group may require a longer gestation period to recoup its investments.
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