Genting SP

Genting SP: CLSA note Genting SP had originally acquired its Echo Entertainment stakes at 433m shares at $4.37, and participated in 1 for 5 rights issue at A$3.30 giving a total investment of $166m for 39.6m shares at an average price of A$4.19. Stake sale at A$3.99, delivering A$158m/S$202m in cash for an estimated loss of A$7.9m or $10.15m, although A$ appreciation will likely result in an FX gain. House note mgt has always said Echo is a portfolio investment and having reviewed it within the portfolio they thought the merits no longer stacked up. Clearly with Genting HK (GENHK) holding 5.1% and applying to go to 20%, the holding is far more strategic. It raises questions about the group intention for Echo, but removes an option for GENS. Questions remain however if GENHK still interested given they applied for probity checks to increase stake to 20% along with Crown, if so why wasn’t the stake transferred to the sister company? Or why not then sell to Crown when its achieves probity approval if GENHK is too hard as a related party. One possible answer is the probity process in NSW was more complicated than Genting thought and to do probity checks on 3 Genting co’s was handicapping GENHK process and giving Crown a headstart. Following the completion of the West Zone, Capex will drop materially, and reduced forecasts from S$250m to S$160m in 2013. As a result house DCF increases to $1.67 and our blended Target from $1.49 to $1.54. However, this whole episode highlights the danger of companies holding too much cash and making inappropriate investments.