Genting Malaysia Bhd (March 18, RM2.84)
Maintain buy with an unchanged fair value of RM3.40: Genting Malaysia Bhd (GenM) has subscribed for US$18 million (RM59.6 million) nominal amount of 9% senior secured notes issued by MGM Mirage Inc due March 2020.

The notes were offered as part of a placement of US$845 million of the notes announced by MGM on March 9, 2010, proceeds of which will be used by MGM to repay borrowings. Notes are secured by a mortgage on MGM Grand Las Vegas.

This is GenM’s third investment into the papers of its peers, bringing total investments in notes of other gaming companies to US$83 million. In May 2009, GenM invested US$50 million in MGM Mirage’s senior secured notes due May 2014 and November 2017. Yields of these notes were 10.375% and 11.125%, respectively.

In October 2009, GenM invested US$15 million in Wynn Resorts Ltd’s 7.575% mortgage notes due 2017. GenM’s cash reserves stood at RM5.3 billion as at end-FY09.

We estimate annual coupon payments from all of GenM’s investments in the notes of various gaming companies at RM28 million. This is about 2% of GenM’s FY10F net profit of RM1.3 billion.

It appears that for now, GenM’s preferred investment exposure into the US is via debt instruments of other gaming companies.

However, we believe that there are opportunities to invest directly into casino assets in the US as Reuters reported yesterday that MGM Mirage would be selling its 50% stake in Borgata Hotel Casino & Spa in favour of its investments in Macau.

Reuters reported that MGM Mirage has sealed a plan to exit the Atlantic City market in favour of the booming Chinese gambling centre of Macau. MGM’s plan to sell its 50% stake in the Atlantic City Borgata casino and give up its New Jersey gambling licence was approved on March 17 by state regulators.

The other 50% shareholder of Borgata Hotel Casino & Spa is Boyd Gaming Corp.

Recall that the New Jersey Division of Gaming Enforcement had previously recommended that MGM Mirage sever ties with Pansy Ho as she was deemed to be “unsuitable” as a business partner.

According to Reuters, MGM would place its interest in the Borgata asset in a trust. The settlement mandates sale of the property within a 30-month period. If it has not found a buyer in 18 months, the trustee would take over the sales process, with another 12 months to conclude the deal.

We believe that this could be a good opportunity for GenM. Although Atlantic City may not be as vibrant as Las Vegas, Borgata Hotel Casino & Spa is profitable. It recorded a net profit of US$35 million in 1H09.

In our previous report in January 2010, we had estimated that Borgata Hotel Casino & Spa’s 9MFY09 Ebitda as US$166 million. Based on a price/Ebitda multiple of 10 times and annualised Ebitda of US$221 million, we reckon that Borgata Hotel Casino & Spa could be worth US$2.2 billion. A 50% stake in the Borgata asset would be valued at US$1.1 billion.

We reckon that GenM should not face any problems financing any acquisitions due to its cash reserves of RM5.3 billion (US$1.6 billion). We believe that GenM would be the vehicle for overseas investments for now as Genting Singapore PLC is busy with Resorts World Sentosa while Genting Hong Kong Ltd’s financials are not as strong as GenM. — AmResearch, March 18

This article appeared in The Edge Financial Daily, March 19, 2010.