GenM’s 1Q18 core PATAMI of RM418m (+16.5% YoY) was within expectations. The lower earnings QoQ were attributed to lower win rates from all operations. Higher YoY earnings were primarily driven by stronger performance from Malaysia operation on the back of strong business volume. FY18 and FY19 earnings are revised marginally higher by 1.8% due to minor model up keeping. We upgrade to BUY with higher target price of RM5.80 (from RM5.10) based on SOP, implying a 10.2x EV/EBITDA. We believe FY18 will be the start of multiyear fruit yielding for its GITP investment. The zerorisation of GST will benefit RWG and cushion the worry on erosion of margin.

Within expectations. 1Q18 revenue of RM2.4bn translated into core PATAMI of RM417.6m, accounting for 23.5% and 25.2% of HLIB and consensus full year forecasts, respectively.

Dividend. None (1Q17: none).

QoQ. Revenue declined by 5.7% on the back of lower contributions from all operations, except for US and Bahamas. Core PATAMI declined by a greater magnitude of 13.2% on the back of lower revenue, lower margin and higher effective tax rate. Lower contribution from Malaysia operation was mainly due to lower hold percentage despite higher volume of business.

YoY. Revenue improved by 7.9% while core PATAMI grew stronger by 16.3%, mainly driven by stronger performance from Malaysia on the back of higher gaming volume for both mass and premium segments, car park income, F&B and hotel operations . This was partially offset by weaker performance from all overseas operations.

RWG. Gaming volume achieved double digit growth YoY while EBITDA margin improved slightly at 33.4% (1Q17: 32.5%) thanks to higher revenue base. Visitors’ growth remained robust with 6.5m visitors (+26% YoY including visit to GPO facilities).

Overseas operations. UK business was hit by lower win rate, partially mitigated by better performance in Egypt. Meanwhile, US operations was affected by lower average VGM win given the larger number of machines as well as unfavourable forex movement. Bahamas reported narrower loss resulting from continued costs rationalisation initiatives.

Outlook. The zerorization of GST will benefit RWG moving forward as the gaming revenue will not be subjected to SST and if there is no revision in any form of tax. Management is still guiding the indoor theme park is likely to be rolled out progressively in the coming quarter, followed by 20th Century Fox theme park by year end.

Forecast. FY18 and FY19 earnings are revised higher marginally by 1.8% due to minor model up keeping.

Upgrade to BUY with higher target price of RM5.80 (from RM5.10) based on SOP, implying a 10.2x EV/EBITDA as we roll forward our valuation to FY19. We believe FY18 will be the start of multiyear fruit yielding for its investment in GITP. The high visitors’ growth achieved will continue to provide the springboard for growth with more facilities to be rolled out in the next one year horizon. The worry on the erosion of margin due to longer gestation period and pre-opening expenses will be offset by the upside provided by the zerorisation of GST.

Source: Hong Leong Investment Bank Research - 25 May 2018