Funds Gamble on Kerzner

When it comes to Kerzner InternationalKZL, the Bahamas-based luxury resort and casino operator, hedge funds are game.

A look at the stock's top 20 holders reveals the presence of four hedge funds, among them activist manager Pirate Capital, with 2% of the shares, according to Thomson One Analytics. Collectively, the four funds owned 7% of the shares as of Dec. 31.

When hedge funds show an appetite for a particular stock, there's often a story. In the case of Kerzner, the catalyst is a belief the company is poised to win two Singapore casino licenses.

"They're seen as the front-runner," says Lawrence Klatzkin, an analyst at Jefferies & Co. who has a buy rating on the stock with an $81 price target. The stock closed Wednesday at $69.35.

Last year, the Singapore government decided to legalize gambling and invited interested parties to submit proposals for two licenses, one for the Marina Waterfront and the other on Sentosa Island. "This project would be extremely lucrative for Kerzner, considering the size of the market and the limited supply. We believe the company has a very strong chance at obtaining one of the licenses," worte Klatzkin in a research report.

Apparently, hedge funds believe that too.

"These are very big contracts. Hedge funds are speculating that Ketzner could get one of these," says Steven Kroll Jr., an analyst at Monness, Crespi, Hardt & Co.

Kertzner is not alone in the race for the Singapore contracts. Two big competitors, MGM MirageMGM and Harrah'sHET, are also involved, along with Las Vegas SandsLVS and Genting from Malaysia.

But Kroll says that Kerzner should benefit from its family-oriented business model. The company's major source of revenue is its flagship Atlantis, an upscale casino resort on Paradise Island in the Bahamas. It's very "focused on family," he says. Besides the casino, the Atlantis complex offers kids activities with 11 pools and a Marine Habitat filled with sharks and fish. This type of resort could be a good fit for Singapore. "Singapore does not want to be cheesy. They don't want a huge casino. They want activities for adults and children and, by the way, good gaming as well," says Kroll.