Responding to a query by Bursa Malaysia on the related party transaction (RPT) announced recently in relation to the proposed acquisition of Empire Resorts (Empire), GENM elaborated the rationale of its plan to acquire a company that is saddled with debt and is on the brink of filing for bankruptcy. GENM believes that its proposal to inject additional liquidity (with Kien Huat Realty via a proposed joint venture to privatise Empire) and its extensive experience in operating casino businesses should enable it to turn around Empire, hence creating value for GENM’s shareholders. Given GENM’s track record as a successful casino operator, we believe that it has the capability to place Empire on a stronger footing but this could take time. In the near term, we reckon Empire’s loss-making operations would be a drag on GENM’s earnings. Given the lack of earnings visibility and uncertainty on the degree of its success in eventually turning Empire around, we impute a 10% discount to our SOTP valuation. As such, our TP is revised down to RM3.20 (from RM3.55 previously). Maintain Neutral on GENM.

• Liquidity issues. In the announcement of its second-quarter financials to the US Securities and Exchange Commission last week, debt-laden Empire highlighted to shareholders the option of filing for bankruptcy, stating that the option would allow it to easier restructure its borrowings. GENM believes that its proposal to establish a joint venture with Kien Huat Realty (Empire’s controlling shareholder as well as the parent company of GENM) and privatization of Empire is the best alternative available that would also benefit GENM’s shareholders. With its extensive experience in operating successful casino businesses, GENM may turn around Empire and thereby increase shareholder value.

• Why is Empire a worthwhile investment? Empire operates Resorts World Catskills (RWC), a casino resort located in Sullivan County, New York. It is one of the newest gaming assets in the northeast US with over USD900m invested so far. It is one of the closest gaming facilities to New York City offering live table games. It is nestled in a scenic range development that includes the third party USD200m Kartrite Resort, a modern indoor waterpark development with 324 brand-new all suite luxury rooms. GENM could take advantage of synergies between its existing operations in New York and RWC, providing both with economies of scale to reduce cost. RWC also has the opportunity to develop a video lottery facility and benefit from the emerging sports wagering market in New York.

Source: PublicInvest Research - 16 Aug 2019