GenM’s 9M18 core PATMI of RM1.38bn (+48.1% YoY) was above expectations mainly due to higher-than-expected win rate and interest income. The stronger performances were primarily driven by stronger visitor flow, gaming volume and win rate from RWG. Management was tight-lipped on the development of outdoor theme park while the indoor theme park is set to be rolled out in mid Dec 2018. Our earnings forecasts are revised upward after imputing marginally higher margin and interest income. Maintain HOLD with lower target price of RM3.23 (was RM3.41) after removing the value of Mashpee’s note from our SOP valuation.

Above expectations. 9M18 revenue of RM7.4bn translated into core PATMI of RM1.38bn came in above expectations at 75.9% and 84.8% of HLIB and consensus full year forecasts, respectively as 4Q is usually seasonally stronger. This was mainly due to higher-than-expected win rate and interest income.

Dividend. None (3Q18: none). YTD dividend was at 4 sen per share.

QoQ. 3Q18 revenue (+7.3%) and core PATMI (+29.1%) of RM539.8m were attributed to higher business volume and better win rate for both RWG and UK operations, partly offset by weaker performances in US and Bahamas due to higher marketing cost incurred. Note that we have stripped off a total of RM2.1bn of exceptional items which include RM1.8bn impairment related to the Mashpee Tribe’s note and RM166.2m of additional tax expenses due to change in the basis of tax incentive utilisation.

YoY. Revenue rose 14.5% in 3Q18 while core PATMI grew stronger by 108.6% mainly driven by stronger volume (+20+%) and higher win rate from VIP players as well as the positive effect of two months tax holiday for RWG. Meanwhile, both US and UK also came in stronger on the back of lower losses from Bimini operations (US) and bad debt recovery from UK operations despite the lower VIP win rate.

YTD. Core PATMI grew by 48.1% on the back of stronger performances from Malaysia and US (lower loss from Bimini). This was partially offset by higher operating cost and weaker performance from UK operations due to higher bad debts written off.

RWG. 9M18 gaming volume achieved double digit growth YoY while EBITDA margin improved to 35% (9M17: 29%) thanks to higher revenue base, better win rate and tax holiday while visitor growth (+14% YoY) remained robust. RM7.3bn of capex from GITP has been incurred and the maintenance capex is around RM300m per annum.

Outlook. Management was tight-lipped with no clear dateline and plan on the development of outdoor theme park following the legal proceedings with Disney. Management is now reviewing its cost structure, marketing and rebates to cushion the impact of gaming tax hike as announced during Budget 2019 without hurting the competitiveness of its gaming business. Meanwhile, Skytropolis Funland indoor theme park is set to be rolled out by mid Dec 2018.

Forecast. Our FY18/19/20 earnings are revised upward by 5%/2%/2%, respectively after imputing slightly higher margin and higher interest income.

Maintain HOLD with lower target price of RM3.23 (was RM3.41) after removing the value of Mashpee’s note from our SOP valuation following the impairment; implying a 9x forward EV/EBITDA. The upside to our TP may not warrant a BUY call just yet due to the uncertainties until the fate of outdoor theme park is crystallized along with the gaming tax hike impact, which potentially undermining the growth expectation on GITP expansion.

Source: Hong Leong Investment Bank Research - 3 Dec 2018