Why I Like Genting Malaysia & Genting Berhad (pls stop laughing)

One must be able to separate an issue from the overall scope of things. Many readers would assume that I have an axe to grind with the Genting group - well, no is the answer. Yes, I have issues about their board's independence, but business fundamentals are another thing.

You would have noticed that since my recommendation of CIMB (@ 10.30), I have not touched on any large caps for the longest time. My rationale is simple, without sufficient liquidity the large caps will find it hard to move. Why then the need to look at Genting Malaysia and Genting Berhad?

Pick up any research report and their target price for both counters are at least 20% above their current prices. Yes, they have been recommending buys on both for the longest time. Opportunity cost people, opportunity cost. Call it a timing strategy, but the bones in me indicate that both counters are likely to outperform over the next 3-6 months substantially.

Genting Malaysia
Ticker: GENM MK
Shares Issued (m): 5,904.4
Market Cap (RM m): 16,768.4
Major Shareholder
Genting Bhd owns 48.65%

RNAV valuation (RMm)
Gaming operations DCF (3% TGR, 11% WACC) 13,618.1
Net cash as at 31 Dec ‘09 5,112.4
Star Cruises market value at USD0.24/share 1,174.6
Wisma Genting and Segambut property 284.1
RNAV 20,189.2
No. of shares 5,940.1
RNAV/share 3.40
Target Price 3.40
Source: Maybank-IB

Genting Berhad
Ticker GENT MK
Share Capital (m) 3704.77
Market Cap (RMm) 26229.79
Major Shareholders
Kien Huat Realty 32.21%
Harbor Capital Advisors 3.56%
Tinehay Holdings 3.29%

Genting Bhd’s SOP table RNAV (RM)
Listed Assets
Genting Malaysia 10,394.9
Genting Plantations 2,726.9
Genting Singapore 14,626.0
Book value of listed assets 2,386.8
Excess from listed assets 25,361.0
NPV of Other Assets Management fees 2,860.8
Genting Sanyen Power 1,627.0
Oil and gas 647.3
Wisma Genting 240.0
Book value of other assets 1,800.0
Excess from other assets 3,575.0
FY09E company book value 7,174.4
Net Asset Value (RMm) 36,110.4
Total no. of shares (m) 3,703.8
NAV per share (RM) 9.70
Target price (RM/share) 9.70
Source: Company, CIMB Research

I have just taken research samples from the two better local research outfits. Nobody talks about "growth", they harp on RNAV, so much so that both have set the RNAV as their target prices. Isn't that strange? Coincidence? Well, probably not so. Both are expecting some significant corporate exercise in the works.

a) If we look at the group's strategy, they are making Genting Berhad as the holding company. Like it or not, much of the family's wealth is tied up in Genting Berhad and to a much lesser extent effectively at both Genting Singapore and Genting Malaysia.

b) The payback period for Genting Singapore will be out there somewhere, a pretty long time away despite looking to be good long term assets.

c) If they will be using Genting Berhad as the holding company, it will be the main M&A vehicle going forward.

d) That being the case, the ammunition power should reside in Genting Berhad.

e) That means Genting Malaysia is holding about RM5bn too much money for all intents and purposes.

f) Genting Malaysia is being remodeled into a dividend stock as Resorts World is a cash generating cow but there is little to expand in Malaysia. I mean, seriously, any more add ons to Genting Highlands will result in serious soil erosion. By leaving Genting Malaysia having just Resorts World, it alienates the risk of that "casino license" being revoked in the future, should that occur. Nobody can totally rule out that risk. Do we know how local politics will play out in 2 years time, what about 5 years or 10 years down the road? By making it a dividend stock, it is facing the reality that there is no growth for that company except organic growth.

g) Following that masterplan, you would want to take out the RM5bn. Genting Malaysia has 5.9bn shares. That works out to RM0.86 per share. A RM0.50 special dividend would tie in nicely with the celebration of the opening of Resorts World Sentosa. A RM0.50 special dividend would send Genting Malaysia rocketing past RM3.00. That surge will put Genting Berhad's into positive territory as well because it will receive RM1.416bn cash. Genting Berhad has about RM1.01 cash per share as it is, or RM3.737bn cash. Added together, that will come to RM5.153bn or RM1.39 cash per share. Of course, they could in the end decide not to do anything with the cash in Genting Malaysia - but chances are they will do something with the cash soon. There is always the concern that Genting Malaysia may not want to issue a special dividend as the family does not control majority of the stock - that's a pretty naive way to run a listed company because these companies are so big now that its virtually impossible to own a majority of the shares. The companies only got so big because of the way they tap capital.

h) Some have been speculating that Genting Berhad should be getting out of plantations, oil & gas and their power business. That would make sense if they want to extract more cash from Genting Malaysia by selling "yielding assets". In that argument, the power plant business could be sold in another RPT back to Genting Malaysia.

As I have said, Genting Berhad is likely to be its holding company, which should means that most of the mentioned assets will stay in the books. While I have always argued that companies should be focused rather than look like a conglomerate - in Genting group's case, they have relatively "pure vehicles" already in Genting Singapore and Genting Malaysia.

I know all this looks more like guesswork but I am willing to place my chips on the table in anticipation of the January 2010 soft opening for Resorts World Sentosa. There is also the likelihood of a likely "euphoric reassessment" of Genting Singapore when that happens. You know how traditional Chinese business people like to make "good things" happening all at once!!! Even if nothing happens, it is not going to cost me much to square off a few months later.

p/s photo: Noon Wongsawan

The above were views on stocks and sectors that I like, not an invitation to buy or sell. It serves as a blogging activity of my investing thoughts and ideas, this does not represent an investment advisory service as I charge no subscription or management fees (donations are welcomed though). The content on this site is provided as general information only and should not be taken as investment advice. All site content, shall not be construed as a recommendation to buy or sell any security or financial instrument. The ideas expressed are solely the opinions of the author. Any action that you take as a result of information, analysis, or commentary on this site is ultimately your responsibility. Consult your investment adviser before making any investment decisions.

Genting Babies - Left Hand, Right Hand & Minority Interests

I am not sure the term "minority interest" appears in Genting's corporate vocabulary.

Genting Malaysia (Resorts) had entered into S&P agreements with parent Genting Berhad to acquire:
a) 25-storey Wisma Genting office building for RM259.6m (including RM46.9m debt owed to Genting Berhad) ; and
b) Segambut land comprising 2 adjoining land parcels with total area of 380,906 sq ft for
RM24.6m (including RM8.6m debt owed to Genting Berhad) .

Both acquisitions will be financed from Genting Malaysia's cash reserves ofRM5.2b as of 30 Sept 09. Independent market valuation for Wisma Genting and Segambut Land at RM277m and RM25.8m respectively. The acquisition price for Wisma Genting and Segambut Land imply a 6.3% and 4.7% discount to the market valuation respectively.

The purchase price at: a) RM635 per sq ft for Wisma Genting; and b) RM65 per sq ft for Segambut Land. Rental savings and income from property investments. Genting Malaysia is currently the single largest tenant for Wisma Genting, occupying 8 floors and 2 basement levels for an annual rental of about RM3.0m. Apart from the rental saving , group will also receive an annual rental income of RM17.3m from other tenants. Together with the savings, investment in Wisma Genting will provides a decent yield of 0.7%. Annual rental savings of about RM0.3m is also expected from the Segambut land as group is the sole tenant renting part of the land as storage area for its buses and limousines . As the Segambut land is only 12% occupied as storage, there is potential to convert the remaining land for property development.

#1: You cannot just say to yourselves that this related party transactions was transparent and above board. You must have the appearance of being transparent as well. Having the same-one valuer does not look good. By right, both the companies should appoint their own valuer, not just one valuation company.

#2: Board composition:
Genting Malaysia (Resorts)
Alwi bin Jantan - Independent director
Wan Sidek Rahman - Independent director
Mohd Haniff Omar (on Genting Bhd board)
Lim Kok Thay (on Genting Bhd board)
Clifford Herbert - Independent director
Loh Bee Hong (on Genting Bhd board)
Lin See Yan - Independent director - (on Genting Bhd board as Independent director as well)
Quah Chek Tin - Independent director - (on Genting Bhd board as Independent director as well)
Mohd Zahidi Zainuddin - Independent director

Thillainathan Ramasamy - Genting Bhd's Independent director
Chin Kwai Yoong - Genting Bhd's Independent director
Nik Hashim Nik Yusoff - Genting Bhd's Independent director

How can you justify having 2 independent directors THAT sits on both companies, one which owns 47% of the other, and call those two directors as independent directors??? Somebody give us a proper business dictionary please!!!!

You not only need to be transparent in your dealings but must appear to be transparent as well. The board's composition for both boards have more double counts than really independent directors. Something needs to be done already with regards to the board's composition, because if not, every single related party transaction now and in the future will ALWAYS be seen in a "conspiratorial" manner. For such an important and visible and international listed company, professionalism and global best practices should be adopted. The company should try to shed its "family company" image if its to continue to global investors respect and recognition for being a well run, transparent, professional and 'above board at all times' kind of company.

#3 Cash extraction - The move may be interpreted as the parent extracting cash from Genting Malaysia. Technically, the move actually provides good yields to Genting Malaysia. But that is not the point or the major concern - if its good for one party, it must be not so good for the other party. Questions will surface as to why Genting Malaysia is being used to keep properties and land, is that a long term strategy to accumulate properties or a slipshod move, neither here nor there. Why is Genting Berhad hiving off assets, is that a long term strategy to be purely gaming - NO of course, have you had a look at Genting Berhad's portfolio???

#4 - Genting Berhad's portfolio dissection - Please tell me how the RPT make sense when in your portfolio of assets you have the following:
a) Genting Malaysia 47%
b) Genting Singapore 54.3%
c) Genting Plantations 54.7%
d) Landmarks 30.3%
e) Oil & Gas ?? (RM1.9bn market value)
f) Power ?? (RM3.0bn market value)
g) Licensing & mgmt fees ?? (RM5.7bn market value)

If you wish to do as you like, then for heaven's sake take the whole bloody thing private. If you want to run it like a family concern, take the whole thing private. You cannot try and tap capital and have investors on board (no matter how small they may be compared to the controlling interest) and still run it like its a family affair.

Considering that the mainshareholder of Genting Berhad shows only Kien Huat Realty with 32.32%, the next few substantial shareholders stand at: 3.8%; 3.57%; 3.3% and 2.6% ... that clearly shows that the free float is huge, i.e. the minority interest is bloody huge.

To the minority interest of Genting Berhad, I am sure having an open tender would have shut 99.99% of us up, it would have shut me up for sure. An open tender may have gotten a better price for Genting Berhad ~ why leave that question mark in our minds, leaves a bloody bitter taste even for such a small transaction. If we cannot "trust you" in these small transactions, how can we trust you in bigger ones?

p/s photo: Dhini Aminarti