Another related party transaction at Genting

Genting Malaysia Bhd
(July 2, RM2.62)
Maintain buy at RM2.74 with lower target price of RM3.40: Genting Malaysia is buying Genting Singapore plc’s UK casino operations (Genting UK) for £340 million (RM1.67 billion) at 1.2 times price-to-book value and enterprise value/earnings before interest, taxes, depreciation and amortisation of 11.5 times.

The rationale is that it provides access into the UK and European Union gaming market at reasonable valuations given the clean up and cost down process that Genting Singapore had undertaken over the years. Transaction should be completed towards end-2H10 and subject to approval of shareholders of Genting Malaysia and Genting Singapore, who are not connected to the companies’ controlling shareholders or senior management team.

As such, dissenting shareholders still can frustrate the transaction if they secure sufficient votes. Bank Negara Malaysia’s approval to make payment to a foreign party is also required. In the UK, special consent is also needed from the Gaming Commission to change the ownership of casinos. The transaction will be fully financed by internal funds. Net cash hoard, which stood at RM5.27 billion at end-1Q10 will be reduced to RM3.61 billion but we do not think that historical dividend of seven sen to nine sen per annum will be affected.

Original investment of £699 million (RM3.43 billion) was written down to £289 million at the latest Genting Singapore 1Q10 quarterly announcement. This would reduce the risk of a large impairment in the near future, especially since the UK casino market is turning around.

We are maintaining our FY10 and lowering FY11 net profit forecast by 6.8% to RM1.23 billion from RM1.32 billion.

Maintain buy with lower target price of RM3.40. With RM3.6 billion left, the group will actively continue to evaluate business opportunities. While we believe share price may react negatively to the proposed acquisition, the fundamental valuation remains intact. — Kenanga Research, July 2



This article appeared in The Edge Financial Daily, July 5, 2010.