THE BUZZ
Genting Malaysia, via its wholly owned subsidiary Genting New York LL, has won the rights to develop and operate video lottery terminal (VLT) facilities at Aqueduct Racetrack in the city of New York, with a financial offer of US$380m (RM1.2bn) as an upfront licensing fee. The concession will be for 30 years, with an option for a 10-year extension.

OUR TAKE
Initial development cost higher than expected. The initial capex, which is likely to be factored in as part of the US$380m (RM1.2bn) financial bid offer, came in above the US$300m (RM945m) quantum that the market had earlier speculated, based on earlier benchmark bids. That said, funding is not an issue given the group’s RM5.7bn cash pile and free cash flow in excess of RM700m p.a. Genting Malaysia will also reinvest a minimum of 0.5% of gross gaming revenue, amounting to a marginal USD2.5m (RM7.9m) to USD3.5m
(RM11.0m), in annual maintenance capex.

Genting group’s financial muscle and reputation prevails. Not surprisingly, Genting Malaysia being the sole surviving bidder has secured the rights to develop and operate the Aqueduct racino after the other bidders were disqualified for submitting non-compliant bids.

Among others, Genting group’s strong international sales and marketing presence and wealth of experience, quality of its casino gaming, leisure and travel services as well as its experienced management team, were cited as key factors in the group winning the bid, for which it secured a score of 95 out of 100.

Next stage of approvals required. Before starting development works, the group would require other approvals from: i) the Governor of New York, ii) the Temporary President of the Senate, iii) Speaker of the Assembly, iv) Attorney General, and v) Comptroller. Thereafter, the signed and approved MOU will be delivered to Genting, after which the group would have to pay upfront the licensing fee to the State within 10 business days.

Opening in 6 months. Genting has proposed a phased development process that will begin with the opening of the preliminary phase of the facility with 1,600 video lottery terminals (VLT) 6 months after approval. This will be followed by the second phase 6 months later, with two gaming floors fully equipped with 4,525 VLTs, a 2,100-space parking garage, and a new pedestrian bridge to the Aqueduct subway station.

Heavy contributions weigh down margins. The racino operator will have to contribute a hefty 70% of its revenue even before deducting marketing, administrative and salary expenses to various state welfare contributions (i.e: Education contribution: 45% of revenue, Lottery administrative contribution: 10% of revenue, New York Racing Association (NYRA): 7% of revenue, Purse support: 7% of revenue). As such, we estimate that the project will likely generate sub-par EBITDA and net profit margins of 12.5% and 6% respectively vs Genting Malaysia’s existing domestic casino EBITDA and net profit margins of 42% and 28%
respectively.

Loan support to NYRA. We also note in the RFP that the racino will have to provide for an emergency financial aid program of USD25m or more to NYRA to assure continued horse racing and pari-mutuel wagering at Aqueduct, Belmont and Saratoga, and if necessary beyond that amount, up to US$2m per month until the opening of the Aqueduct racino.

Contribution of 4% to 6%? Assuming a net win per VLT/day of USD290, which is what the closest “racino” (Empire City casino at Yonkers Raceway to Aqueduct earned in 2009, we estimate that the Aqueduct racetrack casino could generate average revenue of USD473.3m.

However, due to the various legislative deductions and a high tax rate of 44%, the bottom-line contribution from the project could equate to less than 6% of Genting Malaysia’s earnings.

Note that our USD290 net win per VLT/day also assumes the upper end of net wins for racinos around New York city. If we were to factor in the loss of interest income from the USD380m upfront licensing/capex fee, we estimate that the project would only lift Genting Malaysia’s earnings by roughly 4.3%.

Maintain SELL, even after factoring in Aqueduct racino. Ascribing an 8x EBITDA multiple to the Aqueduct Racino project, the incremental value to Genting Malaysia is only RM1.5bn, or RM0.25/share. This would lift our fair value from the current RM2.55 to RM2.80, which would still warrant a SELL recommendation in view of the current share price of RM2.84/share. We have ascribed no value to the group’s cash pile in our SOP valuation, and applied a 10% discount to impute a higher risk premium, with our SOP valuation only
incorporating its domestic gaming business at 8x EV/EBITDA and the market value of its investment in Genting Hong Kong. Maintain SELL and TP of RM2.55, pending final approval of the Aqueduct racino, before factoring it into our valuations. We prefer Genting Bhd (BUY, TP: RM8.90) as a cheaper proxy to Genting Singapore.

Genting New York LLC, a unit of Asian casino group Genting Malaysia Bhd, expects to “open the preliminary phase” of its video lottery facilities, to be called Resort World New York, six months after receiving the licence

Genting New York was recommended to redevelop Aqueduct Racetrack and operate New York City’s first slot machine-style “racino,” lottery officials said.

Genting’s bid, which included a US$380 million upfront payment and was the only offer, meets all requirements, Gordon Medenica, the lottery’s director, said today in a letter to Governor David Paterson recommending the group.

The company became the only contender after Penn National Gaming Inc and a group led by SL Green Realty Corp were disqualified for requesting modified terms. At stake is a state- issued license to install 4,500 slot-machine-style video-lottery terminals at the Aqueduct site in the borough of Queens.

“Genting’s proposal was far superior, in concept, scope, detail and execution, to any we have seen in previous rounds of evaluation,” Medenica said in his letter. “Other bidders, and potential bidders, found the State’s requirements too demanding to accept. They made the fatal assumption that the process was still open to maneuvering and negotiation.”

The bid’s success was “vastly reinforced” by the upfront payment that is higher than the US$300 million required, Medenica said.

Seeking Changes

Penn National today released a letter that its lawyers sent the New York State Division of Lottery, asking it reconsider its Aqueduct proposal terms. SL Green released a similar letter last month, protesting what it called the “flawed” proposal requests.

Genting, which parlayed a single hilltop casino near Kuala Lumpur into gambling resorts in Singapore, the Philippines and the UK, is “aggressively” seeking US gaming investments, Justin Leong, head of strategic investments and corporate affairs at parent Genting Bhd, said in a June interview in New York.

With US$1.7 billion in cash and no debt, Genting Malaysia is seeking acquisitions, new markets and potentially a strategic partnership in the US, Leong said. The Kuala Lumpur-based company, which entered the Aqueduct bidding in June, first invested in US casinos last year, buying MGM Resorts International bonds.

New York lawmakers have been peddling the Aqueduct racino deal since 2001. Under Paterson, two groups were awarded and then lost the license.

In March, Aqueduct Entertainment Group was dropped as unqualified after being selected in January. In October 2008, Delaware North, chosen in October 2008, had to give up the license when it failed to obtain required credit. — Bloomberg

No huge volume today, only small trades by retail investors.

Total volume only 27,369 shares.

(Mon) Price dipped to 2.83 when the starting bell rings, and fluctuated wildly between 2.87 and 2.82 with little volume. Price left the 2.82 level at around 1110, and began oscillating between 2.84 and 2.87. At 1650, about 3,000 shares transacted, sending the closing price to RM2.88. At around 1500, placed a Stop Loss at 2.80 to lock in profit. Will continue to place the Stop Loss at 2.80 tomorrow.

(Friday) Price opened at 2.76, and continue to rally until 2.80, which is very bullish for GENM. Price does not seem to falter and maintains momentum at 2.80 to 2.82 after lunch. I began to notice that consistent volume, and much higher volume compared to previous signifies that there’s a lot traders in the game. I’ve locked in a SELL Order at 2.85 since beginning. However, looking at the bullish trend, I realized that somehow, a sudden spike in price will happen at around 2.83 to 2.84. I was spot on! 10 minutes before 13,806 shares was sold at 2.85, I cancelled my SELL Order. And prices rallied all the way and closed at 2.85, the highest in weeks. The last time price reached this level is on 21st June. Volume was also super high with 105,949 shares traded. Suggested Stop/Loss level at 2.74 (the previous peak’s high). Next resistance is at 2.87 and support level is now 2.78.