We have arrived at a Waterfront Development Project (WDP) valuation of LKR25.0bn, and we forecast this project will contribute LKR24 per share to JKH’s estimated price range, based on a 9.8% risk-free rate, a 5.0% equity risk premium and a beta of 1.3 (considering the risk of the project). However, our estimates suggest that if JKH is unable to obtain at least 32% of the gaming net profit (PAT), it would result in the WDP generating negative NPV from the project.
We derived our estimates based on discussions we had with JKH management and analysis done on similar integrated resorts in the Southeast Asian region. We have forecast the WDP over a 15-year period starting from FY14E until FY28E, and we expect the project to generate full-year operational results from FY19E onwards. Our estimates are based on the assumption that the office complex as well as the serviced apartments will be successfully completed and be earnings accretive from FY21E onwards. Due to the long-term horizon and the resulting risk and uncertainty facing the WDP, we plan to update our forecasts to capture future developments and disclosures made by the company.
We have arrived at the WDP’s gaming revenue and margins by comparing the operations and results of proxies in Asia; we used the results of Resort World Manila (RWM) – which commenced operations in 2009. RWM has approximately 142,000 sq. ft of gaming space (until March 2013, RWM was the only integrated resort operator in the Philippines) and has 287 tables and 1,749 slot machines and generated approximately USD668m in gaming revenues in 2012. We also compared NagaCorp Ltd, the only gaming operator in Cambodia, with approximately 263,000 sq. ft of gaming space, which includes 138 tables and 1,470 slot machines and gross gaming revenue (GGR) of USD251m in 2012.
The WDP is largely targeting high-rollers and other gamers mainly from the India, China and Middle Eastern markets. We forecast gaming revenue through a supply-driven analysis, by estimating the availability of gaming tables and slot machines within 150,000 sq. ft. We estimate capacity at the WDP gaming facility to comprise 200 tables (50 VIP, 150 mass) and 1,000 slot machines. We forecast GGR at LKR65.5bn (about USD429m) in FY19E, with approximately 31% stemming from VIP tables, 35% from mass tables and the remainder from slot machines. Revenue per table per day is estimated at approximately USD7,250 per VIP table, USD2,750 per mass table and USD400 per slot machine. We estimate gaming operations to post an EBITDA margin of 43.0% in FY19E after incorporating a 5% tax on GGR. In addition to the 5% tax on GGR, the WDP’s gaming profits would be taxed at 40%.
JKH’s revenue streams from gaming activities will comprise a fixed rental income from the gaming operator as well as a variable rental (effectively a profit share from PAT), both of which will add to the top line directly. Under our base-case scenario, we expect JKH to obtain 50% of the gaming PAT from the gaming company. Thereby, we forecast JKH to generate revenue of LKR9.0bn from gaming activities in FY19E (the first full year of operations), with the fixed component contributing to about 10% of gaming activity-related revenue. The variable component of revenue should directly translate into EBITDA, and we estimate operational costs from building maintenance to come in at 15% (coming out of the fixed revenue component). These revenues would be tax free.
Although discussions are in progress with a few international gaming operators, a final announcement has not yet been made by JKH. We strongly believe JKH’s selection of an internationally reputed gaming operator will be critical to the success of the project; as such an operator would have the ability to attract VIP and mass tourists to the WDP resort.
Furthermore, two more similar gaming facilities are expected to commence operations in proximity to the WDP – Crown Sri Lanka, backed by Crown Australia, and the Queensbury gaming facility, a project under the Vallibel One group. The Crown Sri Lanka resort is projected to include a 50,000 sq. ft gaming space and will also feature a 450-room five-star hotel, five restaurants, three bars, 38,000 sq. ft of meeting and ballroom space, and luxury retail space. The Queensbury gaming facility, a USD350m project that will be located on a 2.5-acre property, is proposed to include a 500-room hotel, multiple ballrooms, a mini convention center and a shopping mall.