News

Genting Malaysia (GenM) announced the purchase of a Challenger 605 aircraft from Glass Castle Limited (GCL), an indirect subsidiary of Genting Hong Kong (GenHK) for US$17.3m (RM56.7m).

The 12-seater aircraft is currently used by GenHK to fly its premium casino customers.

Highlights

The aircraft purchase came as a surprise as these transactions does not usually come by from gaming companies.

The objective of the purchase is said to be used to serve GenM’s premium players between locations is the United States of America (US) and the acquisition from GenHK (instead of other available parties) entails a shorter delivery time.

We believe the aircraft is likely to be used to transport the group’s premium players within its casinos in the US, namely Resorts World Bimini and Resorts World New York. With the acquisition, gaming revenue and earnings could be boosted by the increasing volume by premium players, albeit marginally.

Besides, the aircraft could also be used by holding company, Genting Bhd (GenT) upon the completion of Resorts World Las Vegas (RWLV). RWLV is slated to have its groundbreaking sometime next year, with the opening of Phase 1 planned for 2015.

To recap, GenT earlier acquired a 87-acre land parcel from Boyd Gaming Corp in Mar 2013 with the aim of developing the land into a world-class destination resort.

The purchase price of US$17.3m is deemed fair and reasonable given that the market price of such aircraft (build in 2007) ranges between US$14.75m to US$22.0m, according to multiple sites that sells used aircrafts.

Furthermore, GenM acquired the aircraft at a discounted price (13.5%) as the original cost of investment to GenHK for the aircraft was US$20m in May 2012.

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

Unchanged.

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

Maintain HOLD call with unchanged SOP-derived TP of RM4.28

Source: Hong Leong Investment Bank Research- 3 Jan 2014