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Genting Malaysia Part 3: Why the market is dead wrong on the acquisition (boostmy)
Links to part 1 and 2 below:
https://klse.i3investor.com/blogs/boostmy/218521.jsp
https://klse.i3investor.com/blogs/boostmy/218784.jsp
Part 3: Why the market is dead wrong on GENM's acquisition
Calculating the replacement cost of constructing a greenfield casino
- The market is fixated on the Empire Resorts Inc deal (the deal) being a related party transaction (RPT) and a loss-making entity. It has failed to look at the deal objectively.
- I have read numerous reports on the deal, but none have attempted to justify the basis of deriving the acquisition price.
- For a loss-making entity, with its primary source of income (Resorts World Catskills) only in its 2nd year of operations, the appropriate valution method would be the Replacement Cost of Assets method (relative valuation methods and discounted cashflows are inappropriate).
- Looking at the deal objectively (disregarding the RPT and current loss-making state of the company), the acquisition is best viewed in comparison with constructing a greenfield casino.
- Except that with the acquisition of Resorts World Catskills, investors are able skip the riskiest period, ie the construction period of 3-4 years, the process of obtaining the casino license, and land lease rights (remember Mashpee?).
- Explained simply, the deal should be viewed as a method of inorganic growth, ie M&A - an alternative to building a brand new casino in New York as part of GENM's organic expansion.
- The enterprise value of 100% in Empire Resorts Inc of USD833.3m is only USD21.9m higher than the total replacement cost associated with constructing Resorts World Catskills up to its current state. In this sense, the deal is fair.
- Just imagine if GENM proposed to construct Resorts World Catskills from scratch, exposing itself to many risks, instead of through the acquisition route. Would the market react the same way?
Why the deal was transacted at 1.6x book value and chapter 11 concerns.
- Because Empire Resorts Inc is a listed company in Nasdaq with a market price (market capitalisation). The deal offered at market price of USD9.74 must take into account both the buyer as well as the seller.
- However, looking at its 52-week range of USD6.31-USD16.96, the acquisition price of USD9.74 is at a 16.3% discount to the median of the trading range, favoring the acquirer slightly.
- Don't forget that while the deal is mainly an acquisition of shares from Kien Huat, it will be extended to the minority shareholders of Empire Resorts Inc and a fair price is necessary for the deal to go through.
- The market's reaction to stating that entering Chapter 11 was a possibility was overblown. The company was stating the obvious when it said that if it continued incurring losses andif Kien Huat or funding from new shareholders was not obtained, Chapter 11 was a possibility.
Why didn't Kien Huat just privatise Empire Resorts itself?
- Because it does not create any synergies or make any business sense. Remember that Kien Huat had been the sole funder for the construction of Resorts World Catskills up to this point, oversubscribing to right issuances at higher prices.
- Synergies will be created after integrating with GENM's Resorts World Casino NYC. It currently has a 41.8% market share in the Northeast US region which will increase with Resorts World Catskill. This will creating better operational scale on loyalty programs and marketing initiatives, not to mention lower administrative costs.
- There is also the consideration of cannibalisation. If Kien Huat fully acquired Resorts World Catskills and continued pouring its own money into the venture as it takes market share from Resorts World Casino NYC, how would investors view it?
Empire Resorts Inc likely to be EBITDA breakeven in 3Q19
- Both GGR and net gaming revenue was up 59% yoy and 2% mom for the month of July 2019.
- This rate of growth, along with the VGM facility at Monticello recommencing in June 2019 and the commencement of sports betting in July 2019, I am fairly confident that Empire Resorts Inc will breakeven at EBITDA level in 3Q19.
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Discussions
1 person likes this. Showing 36 of 36 comments
The asset price has been inflated so high in tandem with the prolonged economic boon in USA. It's about to enter the slump period with asset can be diminishing 50% if the past downturn can be our guru.
2019-08-14 16:02
If things work out you think they sell to you? Just like the money they make from construction you wont see a single sen
2019-08-14 19:03
conclusion is : don't buy and hold genting related stocks
management is the biggest shareholder, family control , can't do much about it, hostile take-over also no use, buy and hold long term sure mati.
unless limp cock tahi and his family hentam their own leg and do something stupid, then only got drama to watch, if not... the vampire will keep on sucking everyone else blood
2019-08-14 20:01
Suit yourselves my friends. I accept your flawed and incorrect views. I will be proven right.
2019-08-14 20:30
then u all in buy genm better add with margin lo, debate what la. In the market, winning a debate is useless
2019-08-14 23:23
boostmy is correct to say that this is a good deal. NY has very little casino, compared to Las vegas. It's the MOST VISITED city in USA
Obtaining gaming license is extremely difficult, due to moral & legal issues. Now GenM buy over another license in Catskill at a mark-up of around 50%, sounds reasonable to me.
2019-08-15 08:54
One of the best article i ever read. A very constructive analysis on the purchase and it make sense because the transaction would bring more benefit to the group, but many people don't see. Successful people are doing their best to grow the business bigger and better, instead of like so many people said LKT trying to con their money, what a pity.
2019-08-15 09:34
Thanks, just hoped to analyse things from a different angle. Media and analysts have portrayed the deal very negatively but without much reasoning.
2019-08-15 10:03
Only few more months to year 2020 and there are still people who think that there are risk-free businesses? Hahaha, pls pass your SPM first.
2019-08-15 10:37
let's talk facts .
https://www.americancasinoguide.com/casinos-by-state/new-york-casinos.html
2019-08-15 12:26
GenM is buying the most important is gaming license, locality, synergies and branding in a good tourism location and the price doesn't even full blown price if they're going to built from scratch like that is happening to Genting Resort World.
2019-08-15 13:30
New york has one of the most lousy tourist infrastructure in the world. it has shitty airport, shit bridges, shit roads. You can use Google Map street view to see that.
But despite all the shit, NY is the MOST visited tourist attraction in USA
There's HUGE HUGE potential for hotels, theme parks, casino etc. The ang mo are too lazy to develop all these.
2019-08-15 13:45
Thanks for the read, just hope more people read my analysis instead of just relying on The Star and The Edge who add little value.
2019-08-15 15:05
the reasons for buying gene has disappeared. steady profit, against recession ,...
2019-08-16 12:14
If LKT made another silly mistake , then Genm will be toasted.
If Empire every year made losses, then Genm is no more blue chip. People will shun this... U know what I mean.
2019-08-16 19:33
Boostmy: U hold alot of genm? Don forget Casino business wont be as good as previous. There are too many casino license. But based on my view, genm will reach 2.50 soon......
2019-08-16 21:48
Dear boostmy,
Price Paid Is Not Very Much Cheaper
-----------------------------------
Actually Genting Malaysia will be paying only a small discount to the initial price KH paid because 2018 losses of USD 155 million.
So Genting Malaysia should be paying not more than USD 392 million less (USD 155 million x 0.84) ie USD 261 million value comparable.
Furthermore, the price did not taken into account 2019 losses which is likely to be around USD 155 million.
Sports Betting with Bet365
--------------------------
Contribution from sports betting will take awhile because there is a USD 12 million annual licence fee plus all takings will have to off-set Bet365 start-up costs. Only after that will Empire have a 50:50 share with Bet365.
New York only allows physical sports betting not online sports betting. Meaning those who bet must be at Catskills resorts.
Plan to shut Monticello Casino & Raceway
----------------------------------------
Empire plans to close its Monticello Casino & Raceway as they are currently cannibalising on Catskills. So if this plan is executed this year. You can expect further write-offs in 2019 that will impact Genting Malaysia's H2 2019 results.
Savings in interest
-------------------
The only upside for 2019, is they will save a chunk of interest expenses (latest quarter interest is USD 17 million incurred and through net savings & savings in depreciation of closure of Monticello Casino & Raceway.
Revenue must rise quickly
-------------------------
Revenue now is at USD 60 million per quarter and loss before interest is at around USD 20 million. Of the USD 60 million revenue only gaming is making significant money, ie for USD 45 million gaming revenue, they make about USD 11 million margins.
So if we are to eliminate the loss of USD 20 million, Empire will need either to improve gaming margins, current at a high of 25% compared with 15% last year or they have to increase gaming revenue by USD 100 million every quarter.
2019-08-16 22:01
The improving GGR is quite convincing to show that Empire Resort is on the right track to breakeven. If GGR can continues to improve in quarters to come, I believe Empire Resort deal can turn from negative to positive.
2019-08-18 15:50
I think the article above is more informative than what our local analysts have written. The analysts only stated Empire Resort has been at loss, but didn't analyse the GGR trend and etc to find out if Empire Resort has potential to breakeven in near future.
2019-08-18 15:53
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CS Tan
4.9 / 5.0
This book is the result of the author's many years of experience and observation throughout his 26 years in the stockbroking industry. It was written for general public to learn to invest based on facts and not on fantasies or hearsay....
kasinathan
You are so naive.... The whole deal was viewed as conflict of interest and detrimental to the existing shareholder of GENM
2019-08-14 15:57