Resorts-More Analysts Feedback

This article was taken from Azlan Abu Bakar's article in THE STAR today. I thought it should give you a window into what the analysts are saying after Resorts dispose half its holdings in Star Cruises recently.

ANALYSTS are generally positive on Resorts World Bhd following the firm's move to sell almost half of its equity interest in Star Cruises Ltd (SCL).

Citigroup Research has upgraded the gaming firm from a sell to buy, and raised its estimates and target price, after taking into account potentially higher cash reserves and revenue growth.

It said the divestment will help reduce Resorts World's exposure to the earnings volatility of SCL, and help remove a major overhang on the stock since the latter has always been a drag on earnings.

Citigroup said the sale will boost Resorts World's cash reserves to an estimated RM3.8 billion by the end of this year, and reap an exceptional gain of about RM309.7 million.

Upon completion of the sale, Resorts will cease to equity account SCL's profit or loss.

"With the sale and the substantial increase in cash reserves, the firm's shares will continue to be driven by hopes of higher dividends," it said in a research note.

Citigroup said given the strong cashflow generated by Resorts World's leisure and gaming-related businesses, its discounted cashflow (DCF)-derived target price is RM4.80 per share. The counter lost six sen yesterday to RM3.96.

OSK Research Sdn Bhd, meanwhile, said it sees a significant re-rating potential for Resorts World following the proposed disposal.

It said the increased focus on the group's high yielding cash generative casino business, both from a valuation and regional growth perspectives, coupled with the room for more aggressive capital management "supports a sustainable re-rating story".

The research house said at its revised target price of RM4.60, Resorts trades at a forward financial year 2008 PER (price earning ratio) of 19.8x, still below its historical high of 24x.

OSK said it will be tweaking its financial year 2008 core earnings estimates upwards by six per cent as Resorts World will no longer have to equity account SCL losses or earnings. "We view the move to have a positive spill over effect across the entire Genting Group, as it signals that the management's pro-active steps in divesting low-yielding non-core assets is gaining traction."

OSK Investment Research,further added in their report that Resorts World had the ability to pay out over 60 sen a share in gross special dividend and doubled its recurring dividend payout based on its robust operating cash flow but this would hinge on whether Resorts World limited its regional growth exposure.

"Resorts World's ability to pay out a substantial special dividend as speculated by the market of up to 60 sen per share (indicative gross yield of 15%) will very much depend on whether Resorts/Star Cruises (SCL) will be the preferred vehicle to undertake future casino growth opportunities within the region," it said.

Affin Research believed Resorts World and/or SCL would be the preferred vehicle to undertake such expansion opportunities, given the former's robust cash flow-generation abilities, experience in managing the largest single site casino in the region by gaming capacity, and the latter's wide customer database and regional exposure.

The research house added that it would be more efficient to tap the source of funding directly from Resorts World for such future growth opportunities, as it substantially reduced minority interest and tax leakages.

It said Genting Bhd's stake in Resorts World had declined from 57% to 49% as a result of the recent bond conversions.

Given Resorts World relatively undemanding valuations and promising future growth prospects, it believed the initiation of an active share buyback would be a more efficient utilisation of cash resource to help Genting raise its stake in Resorts World back to its original levels.

"We think Resorts (World) has the ability to pay out in excess of 60 sen per share (RM3.4 billion) in gross special dividend and double its recurring dividend payout to a 50% net payout ratio, while maintaining a decent average net gearing of 47% over the next two years," it said.

Affin Research said given Resorts World's robust operating cash flow of RM1.6 billion to RM1.8 billion per annum and relatively low capital expenditure requirements of RM350 million per annum, it had the ability to pay up to 0.75 sen per share or RM4.2 billion in special dividend (20% indicative gross yield) and still maintain a net cash position of roughly RM126 million in FY10.

Heartsong