GenM will essentially be acquiring a 49% stake in Empire Resorts Inc. for a total consideration of c.RM846m (USD9.74 per share). Subsequently, GenM will enter into a merger agreement with Kien Huat Realty to form a JV (GenM-KH). We are negative on the news as Empire is still recording losses. Assuming Empire’s FY20 registers a loss similar to that of FY18, we note that the impact to GenM’s bottomline will be approximately -RM283m (c.23% of our FY20 earnings forecast). We maintain our forecasts pending further clarity on the earnings outlook but downgrade our call to HOLD with a TP of RM3.79 to reflect the risk of short-term earnings erosion associated with this acquisition which is loss making.

NEWSBREAK

GenM has entered into a Term Sheet with Kien Huat Realty Limited (KH) to acquire 13.2m shares of Empire Resorts Inc. (Empire), representing c.46% of Empire shares held by KH at a cash consideration of USD9.74 per share, totalling USD128.6m (c.RM538.8m). Note that KH currently owns 84% of shares in Empire. In addition, GenM will submit a preliminary non-binding proposal to acquire the outstanding 16% shares of Empire unaffiliated with KH also at USD9.74 per share, translating to USD77.7m or RM325.7m, based on our calculation. Subsequently, GenM (via its wholl-owned subsidiary GenUSA) will enter into a merger agreement with KH and contribute all Empire shares held into a Proposed JV (GenM-KH 49:51). The said proposals are expected to complete by 4Q19.

HLIB’s VIEW

On Empire Resorts. Main operations of Empire includes: (i) Resorts World Catskills (RWC), a 1,700-acre site in Sullivan County, New York which commenced operations on 8 Feb 2018 and features a 332 all-suite hotel, 1600 slot machines and over 150 live table games; (ii) Monticello Casino and Raceway which features electronic gaming machines; and (iii) a collaboration agreement with Bet365 Group Limited, a British online gaming company based in the UK.

Negative on the news. We are negative on the news in the short term as the acquisition price implies a premium to book value (1.5x 2018 P/BV) despite Empire still recording losses. In FY18, Empire recorded a loss of USD138m which was largely attributed to the high start -up expenses incurred for the commencement of RWC (1Q19 net loss widened by 43% YoY to USD37.6m). Note that the company had also registered losses of USD25m-USD46m in the preceding 3 years. Assuming Empire’s FY20 (full year impact) registers a loss similar to that of FY18, we note that the impact to GenM’s bottomline will be approximately -RM283m (c.23% of our FY20 earnings forecast).

Forecast. Remains unchanged pending more clarity on Empire’s earnings outlook, which at the moment is currently loss making.

We downgrade to HOLD with a TP of RM3.79 (from RM4.21) as we apply a 10% discount to our SOP-derived TP of RM4.21 based on an EV/EBITDA multiple of 9.0x (+1SD above 3 years mean) to reflect the risk of short-term earnings erosion associated with this acquisition which is loss making. On the other hand, the dispute resolution with Fox and clearer direction of the OTP will act as an upswing factor.

Source: Hong Leong Investment Bank Research - 7 Aug 2019