HLIB keeps ‘buy’ on Genting as it sees value in stock, despite extended losses in FY2022

KUALA LUMPUR (April 13): Hong Leong Investment Bank Bhd (HLIB) has maintained its “buy” call on Genting Bhd, with an unchanged target price of RM6.75, as it sees significant value in the stock, despite the company’s continuous headline losses.

Its analyst Tan Kai Shuen said the group’s headline losses for the financial year ended Dec 31, 2022 (FY2022) were mainly attributed to the recognition of large impairment and foreign exchange losses, which he believes contributed to the share price underperformance.

“Firstly, the strong recovery prospects of Genting Singapore plc (GenS) have yet to be fully appreciated and reflected in Genting’s share price, as evidenced by the widening valuation gap between the two stocks, resulting in Genting’s market cap trading below the value of its stake in GenS.

“Secondly, Resorts World Las Vegas (RWLV) is gaining visibility, as it begins to perform up to expectations, which alleviates concerns about the viability of the business,” Tan said in a note on Thursday (April 13).

RWLV recorded its best quarter in the fourth quarter of 2022 (4Q2022), with revenue of RM1.03 billion and adjusted earnings before interest, taxes, depreciation, and amortisation (Ebitda) of RM208.4 million, noted the analyst.

RWLV is expected to improve its performance in FY2023, considering that average monthly gaming revenue in the Las Vegas Strip held steady in the first two months of 2023.

“Given these early data, we expect RWLV to sustain or improve its performance in 1Q2023. In addition, new sporting events, such as the Formula 1 Las Vegas Grand Prix and NFL Pro Bowl in 2023 this year, should also augur well for visitations.

Moreover, the analyst views that the upcoming opening of Fontainebleau Las Vegas, another large-scale integrated casino and hotel at end-2023, may also help to draw more visitors and revitalise the north strip due to the cluster effect.

“If RWLV can sustain and improve its performance from 4Q2022 to FY2023, investors would likely turn more optimistic on the segment and ascribe better valuation to it,” he said.

Meanwhile, GenS is likely to recover beyond pre-pandemic levels, as it remained profitable during the pandemic years of FY2020 and FY2021, despite the absence of foreign tourists, which reflects its incredibly resilient local customer base.

“Due to the high per capita income of the locals, their strong spending power was enough to sustain GenS' performance during the pandemic.

“In 4Q2022, GenS’ adjusted Ebitda recovered to 89% of the pre-pandemic level [in 4Q2019]. This was despite the fact that foreign tourist arrivals only recovered to slightly above 50% of the pre-Covid level in 4Q2022,” he noted.

The analyst opined that GenS’ earnings could scale beyond pre-pandemic levels, once travel trends normalise on the back of China’s reopening since January 2023 and continued recovery in air travel.

Notably, GenS' share price has performed well, surging 63.4% to S$1.16 (RM3.85), from a one-year low of S$0.71 on July 6, 2022.

The research house said that it did not observe the same price trend for Genting over the same period, where its price remained a laggard compared to GenS.

“Due to the price divergence for these two stocks, Genting’s market capitalisation is now trading below the value of its holdings in GenS, at 73.6% of its stake in GenS valued at RM6.34 per share, based on the latest closing price, implying deep value in the stock," he said.

Citing Bloomberg, the analyst said that Genting Malaysia Bhd's sale of its Miami assets is likely to be realised with a value of between US$1 billion (RM4.4 billion) and US$1.5 billion, and may be completed in the coming weeks.

“For Resorts World Genting, despite 1Q being a seasonally stronger quarter due to Chinese New Year (CNY), this could be partially offset by softer visitations in the early part of January, as a result of the Batang Kali landslide as well as the wet weather.

“For its UK operations, we are also starting to see some weakness starting from 4Q2022, as the stubbornly high inflation and rising interest rates spell a double whammy for the segment through higher operating cost (higher wages and utilities) and lower spending from customers,” he noted.

Genting Energy, on the other hand, is expected to improve quarter-on-quarter in 1Q2023 due to lower coal prices, and the resumption of its Indonesia Banten power plant with a high plant load factor.

"In addition, its associate Meizhou Wan power plant may also see higher power generation as the locals returned to the Fujian province during the CNY period post-lifting of pandemic restrictions," he said.

He added: "We now tactically prefer Genting over GenM, as we believe that Genting is deep in value, trading at a discount below its stake in GenS.

At the time of writing, Genting’s share was down 0.43% or two sen lower at RM4.64, with a market capitalisation of RM17.99 billion, GenM was also down 1.49% or four sen lower at RM2.64, with a value of RM15.68 billion, while GenS was unchanged at S$1.16, giving it a market capitalisation of S$14.03 billion (RM46.55 billion).