Funds Gamble on Kerzner

Ricky Sandler, managing member of hedge fund Eminence Capital, which owns a little bit more than 2% of the shares, also sees Kerzner as a front-runner in Singapore, saying it's one of the few companies to develop destination resorts combined with gambling.

In addition, Kerzner, with its successful island resorts, would be a good match with the waterfront locations in Singapore, says Klatzkin.

Finally, the company benefits from its partnership with CapitaLand, one of the largest listed property companies in Asia. Klatzkin says that CapitaLand has good relationships with the Singapore government, which should help. The plot thickens here, as MGM also has a partner with CapitaLand. But Klatzkin says that it's possible to envision that both companies may win since there are two contracts.

The Singapore government is not expected to make a decision before September.

Even without any new businesses in Singapore, Kerzner attracts hedge funds because of its healthy balance sheet and solid pipeline of projects. The company should be a strong earnings grower: it's currently expected to earn $2.59 a share this year, $3.32 a share next year and $4.05 in 2008, according to averages compiled by Thomson First Call. The relatively rich price-to-earnings ratio of 26.8 based on this year's estimate falls to 17.2 looking out two years.

Bulls believe the potential for growth isn't reflected in the company's stock price, a situation hedge funds like to exploit. In 2005, the company held $116 million in cash and cash equivalents. "Cash has always been good. They generate a lot of cash out of their Paradise Island facility," says Kroll.

In addition, "there is a lot of visible growth for a relatively small company," says Sandler. Kerzner has a $2.5 billion market capitalization and 36.5 million outstanding shares. The company has undertaken several projects worldwide that could raise earnings. In Dubai for instance, Kerzner began building a $1.5 billion resort expected to open late 2008. In Morocco, the company has entered a joint venture with two local partners for the operation and development of a resort casino. And by 2007, Kerzner will complete a $700 million expansion plan for its Paradise Island, adding a 600-room, all-suite hotel.