Better luck in the casino and healthy visitor arrivals at Universal Studio Singapore helped to boost profits at Resorts World Sentosa (RWS) in the third quarter, but it was not enough to push it ahead of rival Marina Bay Sands (MBS).
Genting Singapore, which owns RWS, reported on Thursday that third quarter operating profits at Singapore’s first integrated resort rose 8.3 per cent from a year ago to $375.3 million. Genting said this was partly due to a ‘favourable win percentage’ in its premium player business during the quarter. This means that high-rollers took home less in winnings.
SGX’s net cash position and lack of risky asset exposures were attractive to financials investors during the post-Lehman bear market, a period in which SGX outperformed the Singaporean banks. This time around the argument for defensiveness is clouded by the potential for overvalued acquisition.
Defensive in crisis markets
It may be counter-intuitive, but investors seeking financials exposure should consider SGX for its balance-sheet strength. SGX has zero debt and cash holdings of S$693m, or 84% of shareholders’ equity, as of June 2011. Clearly this is a very different risk profile vs that of the banks. We share the consensus view of SGX as a cyclical market proxy, but the stock has outperformed the banks in previous times of crisis, notably in the period of 3Q08–2Q09, when it fell less than the banks and also was first to recover. This could happen once again.
Metal to rock Singapore?
The key problem with the balance-sheet argument is that it only holds true if management avoids engaging in expensive M&A. SGX’s message on cross-border M&A has been mixed since the demise of the ASX deal. But recent media reports on a potential joint purchase of the London Metals Exchange suggest that their ambitions may not have disappeared entirely. Boosting commodities derivative trading in Singapore is strategically interesting, but last year’s adventures in Australia raise concerns that pricing and shareholder value are not key concerns. This also raises questions about the usage of all that cash.
Valuations have never been cheap and are not cheap now, even following the 29% decline since just prior to the announcement of the (ultimately doomed) ASX takeover in Oct 2010. The stock trades at 19x consensus FY12E PER, which is not cheap vs global exchanges, which average 13x forward PER. Our ADT forecast of S$1.3bn for FY12 is conservative and below the YTD run rate of S$1.6bn. Yet the market price implies that velocity and turnover will remain at depressed levels into perpetuity, which seems overly harsh to us.
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