Genting SP

Genting SP: DBSV has sector report with Buy Call and $2.05 TP. House note that according to Reuters, Crown’s billionaire owner James Packer is planning alliance talks with GENS to take control of Echo Entertainment. Crown owns 10% of Echo (seeking regulators’ approval to raise to 20%) while GENS just acquired a 5.1% stake for $305m. Echo’s Chairman recently resigned driven by Parker’s aggressive discredit campaign. Echo due to announce a capital raising exercise, making a takeover bid more complicated and expensive. Prized catch, Echo holds an exclusive licence to operate casinos in New South Wales until 2019 (owns newly renovated The Star, Sydney and 3 casinos in Queensland - Treasury in Brisbane, Jupiter’s in Gold Coast & Jupiter’s Townsville). Packer’s long-term plan may be to leverage on Echo’s licence to build a new A$1b luxury casino at Barangaroo. GENS’ Echo stake may be just an opportunistic investment for now (Genting group had previously run Burswood Casino in Perth, now owned by Crown). Amicable partnership works best. An outright tussle for Echo is unlikely to be wise given Crown’s home-ground advantage although GENS is in a stronger financial position. While this should help put GENS’ perpetual bonds proceeds to use and boost growth/diversify earnings, GENS may be better off saving bullets for potential liberalisation of more exciting gaming markets in Asia (eg Japan and Korea, but timing likely later rather than sooner). GENS has still room to gear up as current net gearing is only 38%, while operating cashflows is a strong US$1.3b p.a. Should GENS raise its stake in Echo to 50.1% or even 100%, GENS will need to fork out US$1.67b or US$3.7bn respectively (assuming 20% premium). This would value Echo at 11x FY13 EV/EBITDA, above both Crown’s and GENS’s 9x - justifiable if synergies can be derived.