(Oct 24, RM3.75)
Maintain hold with revised target price of RM3.95 from RM3.79: Having thus far spent/committed US$1 billion (RM3.13 billion) — equivalent to 9% of 2010 shareholder reserves — to operate the New York Aqueduct racino (NYA) and to acquire prime properties in Miami, Genting Malaysia is now ready to commit to a US$3 billion casino in Miami should it receive a casino concession there. Like New York, South Florida has one of the highest unemployment rates in the US at 10.6%, which supports the establishment of casinos.
NYA’s success in boosting New York’s coffers and creating badly needed jobs will boost its long-term chances of securing more gaming concessions in the US. We understand that NYA received 30,000 applicants for its 1,300 job vacancies.
While our upward revised NYA enhancement to Genting Malaysia’s fair value still remains modest (up to 25 sen per share or 6% of our sum-of-parts (SOP) value), Genting Malaysia’s entry into the US gaming scene creates an interesting “option value” over the long term.
Specifically, it could be a key beneficiary should New York City legalise casinos, and its first-mover advantage provides a decent chance to secure a casino operator licence should Miami legalise casinos outside the Seminole tribe reservations. Nevertheless, the route to legalisation is arduous and likely to be a long process, and competition for such licences is stiff.
Modest upside from NYA, which is expected to account for 4% and 6% of the company’s FY12F net profit and SOP value. We have revised up the expected discounted cash flow (DCF) of NYA from US$126.6 million to US$520.3 million after raising the number of machines and wins per day per machine, and raising the establishment costs of NYA.
The first phase of the NYA is the Times Square casino, which will open for business this Friday with 2,485 video lottery terminals (VLT) and electronic table games (ETG) in operation. By end-December NYA will open the 5th Avenue Casino and the Crockfords Casino with 2,515 VLTs and ETGs.
Overall, NYA will have 5,000 machines comprising 4,525 VLTs and 475 ETGs. NYA is estimated to contribute 14% to Genting Malaysia’s FY12F earnings before interest, tax, depreciation and amortisation (Ebitda), garnering a revenue of US$662.5 million (32% of FY12F revenue) based on our estimated blended average win per machine per day of US$363.
Our assumption is conservative against Genting Malaysia’s expectations (US$800 million gaming revenue) and present experience at Yonkers (average win per day per machine of US$340 for its 5,300 VLTs).
Although there should be new market creation and NYA’s location is thought to be superior to Yonkers in a richer neighbourhood and next to a mass rapid transit station, we reckon that the overall competition will stiffen and industry VLT win per day will ease.
NYA could be a significant beneficiary should New York state eventually legalise casinos, taking into account that New York gamers annually contribute US$5 billion to the casinos in surrounding states.
However, this will prove to be an onerous process which could take a minimum of three years as there have to be two consecutive legislative sessions to pass the bill, following which the measure must be approved in a statewide referendum.
Miami’s appeals court has cleared the way for legislators to expand gaming in South Florida without a referendum. If approved, South Florida will see three resort casinos in Miami-Dade and Broward counties.
However, these three resort casinos will have to be evaluated based on a scoring scale that gives preference to proposals that create the most jobs and complete work the earliest. Genting Malaysia stands a good chance of being one of the three resort casinos as its proposal creates over 5,000 jobs, and it can roll out its casino at the Omni Center within six months of the casino licence approval. — UOB Kay Hian Research, Oct 24
This article appeared in The Edge Financial Daily, October 25, 2011.
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