- We maintain our BUY recommendation on Genting Bhd with a lower fair value of RM10.80/share.

- In spite of our neutral stance on Genting Malaysia (GenM) and Genting Singapore PLC (GenS), we believe that Genting Bhd’s share price would hold up on the back of its proposed special dividend and warrant issue.

- Genting Bhd’s annualised 1HFY13 core net profit was below our expectations and consensus estimates due to GenS’ weak results. We have adjusted Genting Bhd’s FY13F earnings forecast downwards by 14% to account for this. To recap, GenS’ net profit fell by 25.5% YoY in1HFY13 due to a fall in the win percentage in the VIP segment.

- GenS was the largest earnings contributor to Genting Bhd, accounting for 49% of the latter’s 1HFY13 EBITDA. This was followed by operations in Malaysia (41%), the UK (4%) and New York (6%).

- Genting Bhd has proposed a special interim dividend of 50 sen/share less 25% income tax and a restricted issue of warrants on a basis of 1-for-4 at an offer price of RM1.50/warrant. In total, Genting Bhd would be paying RM1.4bil in dividends.

- Exercise price of the warrants is RM7.96/share, which is the difference between the issue warrant price of RM1.50 and the closing price of Genting Bhd of RM9.46/share on 26 August 2013.

- Effectively, a shareholder of Genting Bhd does not need to fork out money to subscribe for the warrants. The subscription cost of the warrant would be paid via the special interim dividend of 37.5 sen/share (after tax).

- The issue of warrants would increase Genting Bhd’s share base by 24.8% to 4.6bil (assuming full conversion). However as the exercise period of the warrants is five years, the impact of dilution would not be immediate.

- Nevertheless as a gauge, we estimate that Genting Bhd’s FY14F EPS would decline by 8%-10% due to the increase in the share base.

- Genting Bhd would enjoy proceeds of about RM7.4bil if all of the warrants were to be converted. Currently, the group has cash of more than RM1bil at the company level.

- Proceeds from the warrants issue would be used for working capital, debt repayment or future investment opportunities, which have not been identified yet. The special interim dividend and warrants issue are expected to be completed by 4QFY13.

Source: AmeSecurities