News

• GenM proposed acquisition of Genting Alderney Limited for a total cash consideration of GBP7.2m, or RM48.09m based on exchange rate of GBP1:RM6.6792. Background

• Genting Alderney is 100% owned by RWI International Investment Ltd, which in turn is owned by GenT (50%) and KHRV Ltd (50%), both of which are controlled by Tan Sri Lim Kok Thay. It was incorporated in Alderney on 22 Nov 2007 and owns a Full eGambling and a Combined Remote Operating Licence to manufacture, supply, install or adapt gambling software and to operate casino.

Comment

• We concur the rationale of the acquisition whereby online, mobile and live retail gaming business in UK will be streamlined and managed under one umbrella to achieve better synergy, cost efficiency and customer experience.

• GenM can tap into the high growth remote casino market which generated GGR of close to GBP3bn (excl. telephone betting) in 2014 (The Gambling Commission of UK).

• Notably, Genting Alderney recorded net loss of GBP3.72m (RM24.85m) and net assets of GBP2.34m (RM15.63m) for the financial year ended 31 December 2014. Assuming the loss persists at current level in FY16, it would reduce our forecasted bottomline by around 1%-1.5%.

• The indicative acquisition price of GBP7.2m is derived by using DCF on a discount rate of 15%; it would reduce net cash of GenM by just around 4%.

• Although the acquisition price of 3.1x net asset looks steep, the high discount rate used to determine DCF would provide some comfort while the price is also lower than RWI’s original cost of GBP12.3m. We are neutral on the deal as achieving higher scale is mitigated by Genting Alderney losses (albeit relatively insignificant).

• No change on the target price and call as we do not foresee this acquisition to have significant impact on the bottomline of GenM in the near term.

Risks

• Regulatory risk;
• Weaker hold percentage; Pandemic breakouts;
• Cannibalization from Macau & Singapore;
• Appreciation of RM; and
• 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 and potential sources 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 with unchanged TP of RM3.86 based on SOP valuations.

Source: Hong Leong Investment Bank Research - 2 Oct 2015