News

• On 15 October 2015, Genting Malaysia (GenM) has entered into a conditional sale and purchase agreement with Esprit Icon Sdn Bhd, subsidiary of Genting Plantation Berhad to dispose two pieces of leasehold land (expired on 27 January 2074) at Segambut with approximate 380,902sf, for RM65.76m (approximate 173psf) via its subsidiary Genting Highlands Tours and Promotion Sdn Bhd.

• About 26% (99,035sf) is currently occupied by GENM Group as the office, storage and depot for buses and limousines; approximately 23% (87,607sf) of the total land area is currently tenanted to a third party tenant for workshop and car parking at a total monthly rental of RM16,200.

Comment

• On positive side of the deal, we reckon that the value of the land would be unlocked as currently it is underutilized; only half of the aggregate net lettable land area is occupied.

• However, as the land was originally acquired from GenT to streamline property investment and management activities and for further redevelopment purpose which did not materialized.

• Moreover, it will also increase GenM’s rental expenses at the consolidated level by about RM375k annually (about RM3.73psf) and it is likely to escalate once the tenancy agreement on the existing land with GenP ends or it is relocating to another place, albeit relatively small amount.

• The original costs of the land were RM24.5m or approximately RM64psf back in 2009 when acquired from its holding company, Genting Berhad (GenT). Hence based on current disposal price, the value has gone up about 170% (annualized return of 28%). Disposal gain is estimated at RM43.3m but would only inflate our estimated PBT by only 1.6% and increase the already strong cash flow by most 1%.

• Overall, we are negative on the disposal of the land as the price of RM173psf is considered underprice compared with the RM280psf paid by IJM Land and FCW Holdings for 15.4 acres freehold land in Segambut in 2013 and related party transactions as well as loss of use and development opportunity of the land albeit limited financial impact.

Risks

• Regulatory risk;
• Weaker hold percentage;
• Pandemic breakouts;
• Cannibalization from Macau & Singapore;
• Appreciation of RM

Forecasts

• No change to our earnings forecasts.

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 an unchanged TP of RM4.35

Source: Hong Leong Investment Bank Research - 16 Oct 2015