Results

GenM reported 1QFY14 core PATAMI of RM361.3m came in below expectations, accounting for only 20.2% and 21.4% of HLIB’s and consensus’ full year earnings.

Deviations

Higher-than-expected payroll costs.

Higher-than-expected D&A costs.

Highlights

Malaysia: Improved revenue yoy was largely due to favourable VIP volume as well as hold percentage (slightly higher than theoretical hold rate), offsetting the poor performance from the highland’s hotel, theme park and F&B divisions (due to lower tourist arrivals). Earnings improved further due to absence of social responsibility effort incurred in 1QFY13 amounting to RM67.7m.

US: Higher yoy revenue driven by the commencement of Resorts World Bimini (RWB). EBITDA was much lower largely driven by loss was largely due to the start-up costs of RWB and lower EBITDA from RWNY.

UK: Recorded higher yoy revenue from higher volume of business in its London casinos and better hold percentage. EBITDA experienced higher growth from higher bad debt recovery.

We are not surprised by the poor performance of Malaysia’s mass gaming and non-gaming revenue as a large portion of its entertainment facilities have been shut down for renovation. We expect growth to resume by FY16 when its outdoor theme park is up and running, along with the additional 1,300 rooms to be added.

Management is expecting the growth momentum in its UK casinos to continue to show healthy trajectory in light of gradually improving economy. The development progress for Resorts World Birmingham is well on track and is anticipated to open in spring 2015.

GenM will also be taking innovative measures to further grow its RWNY’s customer database and visitations. In Miami, the group is in the midst of planning a mixed-use development at the former Miami Herald site. However, further details were not disclosed at this juncture.

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 imputed higher costs under GenM’s Malaysian and RWNY business from higher payroll costs as well as higher depreciation and amortization costs. As such, FY14-16 EPS are cut by 9-10%.

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

Post-earnings revision, TP is cut slightly to RM4.39 (from RM4.49) based on SOP valuations. Maintain HOLD.

Source: Hong Leong Investment Bank Research - 30 May 2014