Results

GenM reported 9MFY14 core PATAMI of RM949.8m came in below expectations, accounted for 73.0% and 67.6% of HLIB’s and consensus’ full year earnings.

We consider this below expectations despite the seasonally stronger 4Q as we foresee 4QFY14 would not be as strong as historically predominantly due to the closure of its outdoor theme park in the highlands.

Deviations

• Higher-than-expected tax rate.

Dividends

• None.

Highlights

Operations in Malaysia experienced lower YTD revenue yoy mainly due to lower hold percentage in its VIP business despite higher volume of business. Malaysia’s EBITDA declined as well due to lower revenue contribution and higher payroll costs.

The group is on track to open 500 rooms by year-end and another 800 rooms by mid-2015. The additional 1,300 rooms would add net >1,000 rooms to group’s hotel inventory as more existing rooms will be refurbished and/or renovated.

UK’s operation stood out in 3QFY14 as it was the only division which recorded a yoy growth, resulting in 15.0% and 13.2% growth in 9MFY14 revenue and EBITDA, respectively vs. losses in 1HFY14.

Despite the operational challenges for Resorts World Bimini (RWB), revenue grew 4.4% from the full commencement of RWB. US bottomline was impacted by the loss in RWB and lower EBITDA in Resorts World New York (RWNY) arising from higher payroll costs.

We understand that the group would be absorbing the GST impact next year and will be based on net collection less gaming duty (gaming tax). As such, the group’s topline and bottomline is expected to be impacted from the implementation of GST in Apr 2015.

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

• Following the higher-than-expected effective tax rate in 3Q, we increase FY14’s tax rate assumptions. As such, FY14-16 earnings are reduced marginally by 0.4-3.9%.

Rating

HOLD

Positives

• (1) Defensive stock; (2) Monopoly in the domestic 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

• Given that the downgrade in forecasts is for FY14, our TP of RM4.16 is unchanged based on FY15’s SOP valuations. Maintain HOLD

Source: Hong Leong Investment Bank Research - 24 Nov 2014