21st March 2013
KUALA LUMPUR: CIMB Equities Research says Genting Bhd is looking for a fourth business as it seeks to diversify from gaming and leisure.
The research house said on Thursday Genting has three main pillars of investment gaming, plantations and energy and is looking for a fourth business. This is despite the renaissance in gaming opportunities around the world and the recent Las Vegas investment.
“The investment strategy here is to have an active private equity portfolio, which currently comprises 20-30 small investments. Small enough to fall under the radar, the investments span a broad range of sectors and even include a stake in a Sri Lankan bank.
“The biggest investment to emerge at this stage is in TauRx Therapeutic, a life sciences company that is focused on the development of treatments and diagnostics for Alzheimer's disease. Genting's participation in its recent round of funding has made it the largest shareholder with a total exposure of US$120mil. TauRx has started its third stage of testing in clinical trials and will know next year whether its treatments are successful,” it said.
CIMB Research said unexpected investments such as TauRx could emerge again if other investments in Genting's portfolio become serious enough to warrant further funding like TauRx.
“While Genting is primarily focused on rates of return, that is exceeding its IRR hurdle rate of 15%, investors could find the entire private equity approach a little disconcerting.
“However, they can draw some comfort from the fact that Genting's investment horizon is conservative and very long term, as illustrated by the number of decades it took to build up the business in Genting Plantations as well as in power and O&G assets overseas,” it said.
CIMB Research said all of Genting's non-gaming investments were developed organically rather than through M&As. It is, therefore, unlikely that Genting will divert a significant amount of resources overnight to a new business. It expected Genting to restrict itself to a measured pace of investment.
The research house said with Genting's disjointed and diversified structure unlikely to change, the group was likely to continue trading at valuations typical of an Asian family conglomerate rather than a focused global gaming giant like LVS.
“However, we believe that the discount is too high. Genting is trading at 5.0 times FY14 EV/EBITDA, making it the cheapest gaming-based conglomerate in the sector. It is trading at a 44% discount to the average EV/EBITDA of 9.0 times for the Asia-Pacific gaming sector,” it said.
The research house said although Genting was sidelined from the growth of the Macau market, there were certain operating characteristics that stand out, namely the operating margins of its casinos because of their monopolistic environment.
CIMB Research also pointed out Genting was trading at a discount to its peers not because of the issue was operational but that Genting was overcapitalised and did not generate a high enough return relative to the size of its balance sheet.
“Even after the Vegas investment, it will still have RM25bil cash on its consolidated balance sheet in FY14. Genting and SJM Holdings standout among regional peers as having the strongest balance sheet.
“An easy re-rating would be from M&A but not of the type seen in Vegas where returns are expected to come over the longer term. Genting has the capacity to absorb sizable operating companies that could contribute to the bottomline immediately,” it said.
[Source]
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