GenM’s 1QFY19 core PATMI of RM377m (-41.6% QoQ; -9.7% YoY) was above expectations mainly due to higher-than-expected win rate and better-than expected operating efficiency. 1Q19 improved core EBITDA (+4.8% YoY) were primarily driven by higher non-gaming revenue and higher win rate. We believe that the group will continue to place focus on the non-gaming segment to cushion the slowing gaming segment. Our earnings forecasts are revised upwards after imputing slightly higher margin for operations in Malaysia. Upgrade to BUY from HOLD with higher SOP based target price of RM3.53.

Above expectations. GenM registered record high revenue of RM2.7bn in 1QFY19. This translated into core PATMI of RM377m, which came in above expectations at 31% of both HLIB and consensus full year forecasts. The positive deviation was mainly due to higher-than-expected win rate and better-than-expected operating efficiency.

Dividend. No dividend was declared, as dividends are usually declared in 2nd and 4th quarter.

QoQ. Revenue increased by 9.1% thanks to higher contribution from Malaysia and US segment. However, core EBITDA fell by -8.6% dragged by higher casino duty and higher cost relating to premium players business in the Malaysia segment, coupled with lower revenue and lower debt recovery from UK. Core PATMI further declined by -41.6%, due to higher D&A and finance cost.

YoY. Revenue improved by 14% in the quarter despite the gaming tax, thanks to better performance from non-gaming segment and the exceptionally higher win rate. The higher revenue also brought core EBITDA up by 4.8%, mainly driven by group’s continuous cost rationalisation effort (reducing payroll, lower marketing expenses and etc). However, core PATAMI declined by -9.7% due to lower interest income from the absence of promissory note and higher finance cost.

Positive surprise from non-gaming revenue. During the period, the newly implemented non-gaming facilities showed commendable results. Especially Skytropolis which recorded revenue of RM22m vs RM5m in 1Q18. GenM also managed to hike average room rate (ARR) to RM210 which doubled YoY from RM104. We believe that the group will place focus on the non-gaming segment and the segment will continue to show growth which is likely to cushion the slowing gaming segment.

Forecast. We raise our FY19/20 earnings by 8%/10%, respectively after imputing higher EBITDA margin as a result of better operating efficiency .

Upgrade to BUY from Hold with higher SOP based target price of RM3.53 (from RM3.36). We turn slightly more optimistic as the group has proven their ability in cost optimisation. However we would like to highlight that the uncertainties arising from the fate of outdoor theme park remains a potential risk as GenM may face counter claim of USD46m from Disney and incur more expenses on removing existing IPs if the legal outcome turns unfavourable.

Source: Hong Leong Investment Bank Research - 30 May 2019