S&P raises NagaCorp rating to B+ on stable outlook

S&P Global Ratings Inc has upgraded its long-term issuer credit rating on Hong Kong-listed NagaCorp Ltd to B+ from B on reduced operating risks in Cambodia while maintaining a stable outlook based on the expectation the company would have a stable operating performance and high capital expenditure (capex) in the next 12 months.

The ratings agency also raised its ratings to B+ from B on the gaming company’s senior unsecured notes, it said in a note to clients on Tuesday.

“In our opinion, uncertainty in Cambodia has reduced after the national elections earlier this year. We believe this would help ensure a stable policy environment that has previously resulted in robust economic growth.

“The improved operating conditions also translate into lower transfer and convertibility (T&C) risk for Cambodia. T&C risk reflects the risk of the government restricting entities such as NagaCorp from accessing foreign exchange to meet their debt-service obligation,” it said.

S&P said NagaCorp’s strong operating performance should also support its credit profile, given that its revenue rose some 80% in the first half for the financial year ending December 31, 2018 (1HFY18) on the back of its Naga2 gaming facility commencement on November 2017.

In April, Moody’s Investor Services assigned a first-time B1 corporate family rating to NagaCorp.

Moody’s said NagaCorp’s B1 rating was supported by the company’s diversified business, which allows it to generate a fairly balanced gross profit distribution across its three major business segments of (1) mass-market table games; (2) mass-market electronic gaming; and (3) VIP gaming.

The company also derives earnings from a diversified customer base, with tourists arriving from Greater China, Malaysia and other Southeast Asian countries.

“NagaCorp is rated one notch above Cambodia’s sovereign rating, based on our assessment of the low likelihood that NagaCorp would be affected in the event of a weakening of Cambodia’s economic fundamentals,” said Jacintha Poh, who is Moody’s Lead Analyst for NagaCorp, adding “The company generates nearly all of its revenue from tourists and does not rely on domestic banks or capital markets for funding.”

S&P meanwhile said that higher “VIP” gaming revenue and lack of electronic gaming machine (EGM) rights translated to lower margins of about 32% in 1HFY18 compared to 45% in the same period in 2017.

On capex, the ratings house expects it to increase over the next one to two years as the company is renovating its flagship property Naga1 to match the quality provided at Naga2.

“The project involves renovation of hotel rooms and common areas, and is likely to be completed in 2019. NagaCorp would use funds raised through US$300 million non-convertible senior unsecured bonds issued in May 2018 and internal cash flows to fund the investment,” it added.

It noted that NagaCorp could simultaneously pursue multiple opportunities for international development or expansion of its domestic operations but the timing of such opportunities is uncertain and would depend on the company getting the gaming licenses, and on government regulations and project completion.

These discussions are preliminary and any meaningful investment could be distant, it added.

Meanwhile, S&P believes that NagaCorp would sustain its dominant market position in the Cambodian gaming industry and have stable operating performance over the next 12 months.

However, it expects the company to remain exposed to volatility in earnings, and that it would also have lower operating margins as the share of VIP gaming revenue rises due to high capex.

“We would lower the rating on NagaCorp if the risk of operating in Cambodia increases, resulting in higher T&C risk,” it said.

S&P pointed out that although it is unlikely, it might lower its rating if the assessment of NagaCorp’s stand-alone credit profile (SACP) weakens due to unexpected material debt-funded acquisitions, adoption of new projects faster than anticipated, substantially weaker operating performance with the debt-to-earning before interests, tax, depreciation and amortisation (EBITDA) ratio staying above four times for a prolonged period.

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