Dare to catch falling knife Genting now? It could be cheaper

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Jun 11 2008
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The talks of selling off its power assets to concentrate and rebrand Genting Group (KLSE: GENTING, stock-code 3182) as the pure casino player has been going around for some time. Singapore would be Genting’s new flagship in its plan to hedge its current hilltop Genting Highland, what more with the current political volatility. Of course this doesn’t mean the new government, should Anwar succeeded in topples existing government, would put a barricade preventing people from going up the hill the same tactic used by Grand Saga.

Political’s potential impact on Genting

In reality, Genting Berhad alone contributed hundreds of millions in taxation to the government. For the financial year ended 2007 alone the company paid a whopping RM662 million in tax to the nation’s coffer and it would be extremely stupid for the new government to kill the goose that lays golden eggs. But people especially investors are simply nervous with the prospect of PAS, a component of opposition Pakatan Rakyat (People’s Alliance) led by Anwar Ibrahim, which is said to be the kingmaker (hell, there’re so many kingmakers nowadays) would goes berserk and wants the only licensed casino in the country to close for good. Even if PAS could not force its way through (closing casino), a simple proposition from the Islamic Party to convert Genting’s license renewal to monthly basis would spark a major sell-off.

Genting stock chartHowever we wouldn’t know until the time comes and for the time being, let’s focus on Genting stock which has been consistenly plunging since the early of the year 2008. First the support level of RM7.80 was breached and about four months later the support of RM6.40 gave way. Since then all hell breaks loose and it appears the falling knife is having fun without any sight of new support. In fact if you believe in the theory “Buy on Rumors and Sell on News” then you wouldn’t have nightmares because you would have locked in profits after the company won the Singapore’s Sentosa Integrated Resort Project or at least after the share split of 1 into 5. Easier said than done huh? Well that’s the theory but in practice human tends to fall in love in their stocks easily. People would rather divorce their spouse than to say goodbye to their stocks.

When would Genting exit non-gaming business?

Recent speculations that Genting was exiting the power generation failed to excite the stock. Besides Tenaga Nasional Berhad’s (KLSE: TENAGA, stock-code 5347) other interested parties include Malakoff Bhd, Tanjong Plc and Standard Chartered private equity fund. Genting should be able to walk away with at least RM3.3 billion if it decided to let go of its lucrative power assets in Malaysia, China and India. It makes business sense for Genting to focus on its business in Singapore which is chewing up to S$6 billion (RM14.2 billion) after its initial budget skyrocketed by additional S$800 million. Furthermore power business contributed only 6 percent of Genting’s profit.

Genting Revenue 2003 - 2007Genting Net Profit 2003 - 2007Genting EPS 2003 - 2007About a year ago, speculations were circulating that Genting’ may sell its oil palm business entity, Asiatic Development Berhad, with IOI Corp Berhad (KLSE: IOICORP, stock-code 1961) being the acquirer but the rumors evaporated thereafter. I’ve wrote earlier that Genting is not the stock to choose if you’re looking for good dividend yield stock. For the first quarter ended Mar 31, 2008 Genting’s net profit dropped 33% to RM439.4 million from RM656.7 million a year earlier despite a revenue increase of 7% to RM2.16 billion from RM2.02 billion. If not for the plantation business whose pre-tax profit more than doubled to RM133.5 million from RM57.8 million, Genting’s earnings could be worse. Earnings per share fell to 11.87 sen from 17.78 sen. So, Genting’s management is in dilemma as to the plans to exit non-gaming business now.

GIL and Genting Berhad stocks – not yet

People were talking about the shift in focus to its Singapore operation and Genting International Plc (SIN:G13) immediately comes into picture. But do you really need to rush in for the Singapore-listed GIL (Genting International Plc) stock now? Without profit stream from the new casino, GIL is merely penny stock since revenue from UK operations was pathetic. Some research house might forecasted Genting’s net profit for FY2008 and FY2009 to come in at RM1.6 billion and RM1.7 billion respectively but in reality people are worried that more and more money are being transferred from Malaysia to Singapore – for obvious reason.

Genting International stock chartIf Genting were to decide to exit its power and plantation business, majority of the money liquidated would flows back to Singapore’s operation. But before the egg almost hatches, it’s still too early to think about GIL. How about local Genting Berhad itself? You might be mouth-watering that Genting stock is currently trading at multiple of 10.1 times its earnings – a very attractive price indeed. Well, it’s a freefall now and if you’re lucky the stock could stop bleeding at the support level of RM5.10 but beyond that you might scream “it’s cheaper at RM4.30”. Nevertheless the fact remains that Genting is super-sensitive to current political landscape and with the alternative in Sentosa, Genting had secured a better hedge option.

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Politics is affecting every market.

indeed it does …

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