Results

GenM reported 1HFY13 core PATAMI of RM971.8m came in above expectations, accounting for 56.7% and 57.8% of ours and streets estimates.

Deviations

Lower-than-expected effective tax rate.

Dividends

Declared interim dividend of 4.3 sen less 25% tax, representing 27.7% dividend payout and yield of 1.1%.

Highlights

Revenue grew marginally at 1.6% in 1HFY13 compared to 1HFY12 with the help of growth in its Malaysian and US operations. UK operations on the other hand suffered a decline of 5.3% due to lower average hold percentage despite growth in volume of business in both its London and provincial casinos.

Overall 1HFY13 EBITDA experienced a decline of 3.3% despite a growth in revenue due to narrower margins as 1HFY13 incurred higher operating expenses from group’s social responsibility efforts (Malaysia) and higher bad debts written off (UK).

Looking into individual division, hospitality’s revenue was up from the 2% increase in average room sold despite a lower occupancy rate of 93% (1HFY13) vs. 94% (1HFY12). This is because there were more rooms available upon the completion of its refurbishment activities.

Management also guided that capex for FY13 will include the upgrading works for the theme park in the highlands, development of 1,300 hotel rooms, construction of Resorts World Birmingham (slated for opening in mid-2015) and an addition of a 300-room hotel in Resorts World Bimini.

For the prospects going forward, GenM will tap the expanding regional market and continue to grow the international premium players business. In the UK, the progress of construction of Resorts World Birmingham is well underway. Over in the US, the subway station connected to RWNY has been completed and the group expects higher visitorships to the casino going forward.

Risks

1) Regulatory risk; 2) Weaker hold percentage; 3) Pandemic breakouts; 4) Cannibalization from Macau & Singapore; 5) Appreciation of RM and 6) Bill on full gaming operations in New York not approved.

Forecasts

We tweaked our earnings upwards by 7.4% for FY13 from higher D&A assumptions which are sufficient to fully offset by the lower effective tax rate. For FY14-15 earnings are reduced by 1.6% and 0.4% to account for higher D&A costs.

Rating

HOLD

Positives – (1) Defensive stock; (2) Monopoly in the industry; and (3) New source of earnings from international markets to drive earnings growth

Negatives – (1) Highly regulated industry; and (2) earnings highly dependable on luck factor and hold percentage

Valuation

Despite the change in our FY13 earnings forecast, we maintain HOLD call on GenM with unchanged TP of RM4.25 based on SOP as our valuations are based on FY14.

Source: Hong Leong Investment Bank Research - 30 Aug 2013