OSK Research Latest Update on Resorts World

OSK Research believes that Resorts World (Resorts) possess the potential for more profit growth given the expanding floor space,rising casino patronage and increasing business volumes driven chiefly by higher room capacity and guest visitations.

Given its experience in managing the largest single casino in the region, Resorts is poised and ready to participate directly in future casino growth opportunities around the region particularly in Japan and in the Philippines.

It said Resorts’ current share price of RM3.66, which is 16.6 times the FY08 price earnings ratio versus the 3-year historical high of 24 times (or 7% discount to Genting Bhd), provides upside if and when such opportunities arise over the next 6 to 12 months.

Despite the high revenue base created by 3Q05’s astounding 42% year-on-year growth, it said Resorts had been able to sustain a commendable revenue growth of 7%-12% in third and fourth quarters of FY06, even on the back of a 2% to 3% decline in visitors’ arrivals.

"With e-gaming only contributing to an estimated 12% of Resorts’ total grind table capacity, we believe that there is ample room for e-gaming to form a meaningful component of Resorts’ future growth," it said.

It said the acceptance level of e-gaming remained high across both the older and younger age profiles, helping to stimulate a new market segment which was even more important considering Malaysia’s young population age profile.

OSK Research said despite a 24% year-on-year increase in total room capacity in FY06, occupancy rates remained relatively resilient at 82% in the first quarter of FY07.

"The growth potential is staggering, considering the fact that hotel guests currently contribute to just 20% of Genting Highland’s total visitors arrivals, while average spending per hotel guest is also higher," it said.

It added that anecdotal evidence suggested average spending per visitor had grown in tandem with the number of hotel rooms sold.

According to the report, Resorts has historically traded at a 30% to 50% PER valuation premium of Genting Bhd. However, it currently trades at a 7% discount to Genting, mainly attributed to market’s perception over its subdued future earnings growth potential.

"However, if Resorts’ recent 1Q07 results are of any guidance (core leisure and hospitality revenue up 32% year-on-year), we think that full-year results are likely to surprise on the upside, paving the way for further share price re-rating.

"At our target price of RM4.20, Resorts trades at a forward FY08 PER of 19 times, still below its historical high of 24 times," OSK Research said.

Heartsong