Super-duper Dividends from Resorts?

There have been a couple of analyst reports on Resorts after it disposed of almost half of its share holding in Star Cruises to Chua Ma Yu.

Here is the analysis by Citigroup Global Markets Equity Research.

RESORTS World Bhd's sale of 14.02% stake in Star Cruises for RM1.17 billion cash will boost Resorts' cash reserves by RM1.68 billion to an estimated RM3.8 billion by end-2007.

Citigroup Global Markets Equity Research said yesterday Resorts' original cost of investment on the 1.01 billion shares between 1998 and 2000 was US$426.4 million (RM1.47 billion).

However, it has since written down its investment to US$248.1 million as at Dec 31, 2006. Based on the selling price of RM1.17 billion, Resorts is expected to rake in an exceptional gain of RM309.7 million.

Upon completion of the sale, Resorts' stake in Star Cruises would fall below the 20% level to 18.89%. As a result, Resorts will cease to equity account Star Cruises's profit or loss.

"We view the divestment positively as it will help reduce Resorts' exposure to the earnings volatility of Star Cruises and help remove a major overhang on the stock since Star Cruises has always been a drag on earnings.

"We are upgrading Resorts' rating from Sell (3L) to Buy (1L) and raise estimates and target price," it said.

Citigroup raised Resorts' earnings estimates by 2.5% for FY07, 9.2% for FY08 and 13% for FY09 after taking into account higher cash reserves and gaming revenue growth but removing equity accounting profit of Star Cruises.

It added that its discounted cash flow derived target price was raised from RM2.84 to RM4.80 per share after incorporating a higher share price of Star Cruises at 45.5 US cents (versus 28 cents before).

Also incorporated into the new target price were other and higher revenue growth assumptions of 14% (versus 10%) for FY07 and 10% for FY08-10 versus 4% previously.

"We are now using a high perpetuity growth assumption of 3.5% as opposed to 2% previously," it said.

Citigroup said with the sale and the substantial increase in cash reserves, Resorts' shares would continue to be driven by hopes of higher dividends. With lower exposure to the financially cash-strapped Star Cruises, chances of higher dividend are now better.

Heartsong