Investment Highlights

• We maintain our HOLD recommendation on Only World Group (OWG) with a lower fair value of RM0.56/share (vs. RM0.64/share previously). Our valuation is based on a PE of 16.5x FY21 EPS.

• We have cut our earnings forecasts for FY20F, FY21F and FY22F by 54%, 13% and 13% respectively. Key upside risks to OWG include higher-than-expected increase in visitors in The Top, Komtar, a surge in foreign tourists and early opening of the outdoor theme park at Resorts World Genting.

• 1QFY20 core net profit of RM73K missed our and street’s earnings expectations, accounting for 1.6% and 1.1% of full-year earnings forecasts respectively. The variance against our forecast was largely due to the high taxation rate of 89.8%, high cost of sales and selling, and distribution expenses.

• Key highlights of OWG’s 1QFY20 results include:

• OWG’s top line grew 2.2% YoY to RM33.7mil on the back of improvements in its food service operations (FSO) and retail services. This was mainly due to the increased footfall at its Genting operations. Skytropolis Funland, the indoor theme park at Resorts World Genting, opened in December 2018. We believe OWG’s operations also benefitted from an increase in patrons during the three long weekends in September.

• OWG’s FSO segment revenue climbed 8.5% YoY to RM18.3mil in 1QFY20 (RM16.8mil in 1QFY19) due to the higher footfall in Genting Highlands and the opening of a new FSO at Bangsar Shopping Centre in May 2019.

• We believe that OWG’s operations at Resorts World Genting would continue to see an improvement due to the recent opening of the indoor theme park and the upcoming opening of the outdoor theme park, which is slated to open in 3QCY20.

• OWG’s family attraction segment saw a revenue drop of 32.7% YoY to RM10.1mil (RM15.0mil previously) due to a lower volume of business at The Top, Komtar Tower, Penang and the closure of Kota Tinggi Resorts in 3QFY19. We believe that OWG’ operations at The Top, Komtar would continue to be a drag on the group’s profitability due to its high fixed costs and weak volume of business.

• OWG’s other services operations revenue rose 30.1% YoY to RM5.4mil in 1QFY20 (RM4.1mil in 1QFY19) due to contribution from its 10 retail outlets in Genting Highlands and Bangsar Shopping Centre, which opened in 2QFY19.

• OWG’s effective tax rate was high at 89.8% as the group incurred some non-tax deductible expenses. Also, there were losses incurred by certain subsidiary companies, which could not be set off against taxable profits in other companies within the group.

• OWG is currently operating over 20 FSOs and more than 15 family attractions and other services at Resorts World Genting. Recall that Genting Malaysia’s outdoor theme park will utilize both Fox and non-Fox intellectual properties after the settlement agreement with 21st Century Fox and The Walt Disney Company. Therefore, we believe OWG’s performance will improve in FY21F and FY22F. On a negative note, we believe that earnings contribution from OWG’s operations at Resorts World Genting will be partly offset by its operations at The Top, Komtar Tower.

Source: AmInvest Research - 18 Nov 2019