Highlights

Genting Malaysia Berhad - Further Delays In Opening Of Theme Park?

Date: 28/11/2018

Source  :  PUBLIC BANK
Stock  :  GENM       Price Target  :  2.70      |      Price Call  :  SELL
        Last Price  :  3.06      |      Upside/Downside  :  -0.36 (11.76%)
 


Genting Malaysia (GENM) announced yesterday that it is suing Walt Disney Co (Disney) and Twenty-First Century Fox, seeking damages exceeding USD1bn for breach of contract in relation to its planned outdoor theme park at Genting Highlands. GENM had entered into a Memorandum of Agreement (MOA) with Twentieth Century Fox Licensing & Merchandising in 2013 whereby GENM was granted a license to utilize intellectual property rights associated with Fox theatrical motion pictures for its outdoor theme park under the Genting Integrated Tourism Plan (GITP). We believe the legal proceedings will take time to conclude and in the meantime, the opening of the theme park is likely to be further delayed. This should affect visitor arrivals at Genting Highlands. We slash our visitor arrival growth rate from 8-9% to 3% (based on 10-year historical average) for FY19-20F, resulting in a cut in our earnings forecasts by 9-16%. We have also ascribed a lower PE multiple for the Malaysian gaming operations in our SOTP valuation (from 14x to 9x), given the uncertainties surrounding its GITP project. Maintain Underperform on GENM with a revised TP of RM2.70 (previously RM4.00).

  • Background of the MOA. According to news reports (Star Online & Los Angeles Times), problems began as Fox engineered years of delays to force a renegotiation of the contract. In the original agreement, Fox would only start receiving annual fees and royalties after the park opened. However, the MOA was subsequently amended in 2014 and 2017, allowing Fox to start receiving annual fees and royalties immediately. Following the acquisition of Fox by Disney, the former was pressured to terminate the MOA as Disney does not want to be associated with gaming companies due to its “family-friendly” branding. Fox subsequently issued a notice of termination to GENM and claiming approximately USD46.2m in accelerated payments. GENM believes that Fox has no right to terminate the agreement and hence, is claiming for the cost of investments and punitive damages exceeding USD1bn. GENM is believed to have invested about USD750m in the theme park.
  • Financial impact. The opening of the outdoor theme park was expected to draw more visitors to Genting Highlands with our earlier forecasts projecting 8- 9% annual visitor arrival growth rate for FY19-20F. Following this announcement, we believe the opening of the theme park will be further delayed (initially targeted to open by 1H19). As such, we slash our visitor arrival growth rate to 3%, based on a 10-year historical average. As a result, we revise down our FY19-20F earnings by 9-16%. In the event that GENM wins the legal proceeding and receives USD1bn compensation, its GITP project could still remain in limbo without a key attraction. Seeking an alternative intellectual property licensing would be a challenge, in our opinion.
  • Impairment risk on promissory notes? We would like to highlight that there is also a potential impairment risk on GENM’s investment in promissory notes for the financing of the Mashpee Wampanoag Tribe’s development of an integrated resort in the US. Its total investment (including accrued interest) in the promissory notes as at June 30, 2018 amounted to USD426.3m (or RM1.8bn). The US Department of Interior is reviewing the Tribe’s rights to the land, subject to a legislation being introduced and passed in the US Congress.

Source: PublicInvest Research - 28 Nov 2018

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