GenM’s 2QFY19 core PATMI of RM259.7m (-4.7% QoQ; -14% YoY) was within our and consensus full year forecasts. We deem this within expectations as we note that losses from the Empire acquisition should flow in sometime in 4Q19. Management was not able to comment on the magnitude of cost saving synergies of its US operations with Empire. As such, we remain pessimistic on Empire’s ability to turnaround its loss-making business in the near-term. With regards to the OTP, management is targeting to commence its operations by 3Q20. We lower FY20/21 earnings by 16%/10% respectively as we impute the potential losses from the acquisition of Empire. We maintain our HOLD call with a lower TP of RM3.38 (from RM3.79) as we apply a higher discount at 20% (from 10%) to our SOP-derived TP of RM4.21

Within expectations. GenM reported 2QFY19 core PATMI of RM259.7m (-4.7% QoQ, -14% YoY), which brings the 1HFY19 sum to RM737m (-11.8% YoY). This formed 56.4% and 59.5% of our and consensus full year forecasts, respectively. We deem this within expectations as we note that losses from the Empire acquisition (equity accounted) should flow in sometime in 4Q19 (i.e. target completion deadline).

Dividend. Declared interim dividend of 6.0 (2Q18: 6.0) sen per share, going ex on 18 Sep 2019.

QoQ. Revenue decreased by -4.9% to RM2.6bn largely due to lower contribution from the Malaysian segment. Consequently, core PATMI decreased -4.7% to RM359.7m in tandem with revenue as an improved EBITDA from the US was offset by a higher effective tax rate.

YoY/YTD. Revenue improved by 7.4%/10.7% RM2.6bn/RM5.3bn in the quarter thanks to improved hold percentage in the mid to premium players in the Malaysia segment. Core PATMI however, decreased -14%/-11.8% to RM359.7m/RM737m from higher finance costs alongside lower interest income received (c.RM60m/quarter) from the absence of Mashpee promissory notes.

Outlook. With regards to the recent proposed acquisition of Empire, management still remains confident on its ability to carry out cost synergies between its US operations but was not able to comment on its magnitude. As such, we remain pessimistic on Empire’s ability to turnaround its loss-making business in the near-term. With regards to the OTP, management is targeting to commence its operations by 3Q20. Royalties required to pay for running the OTP is confidential but we note that it will command margins of c.40%-45%. Moving forward, Malaysian operations are expected to be subjected to c.15% tax rate from the utilisation of tax incentives.

Forecast. No changes to FY19 earnings as the results are deemed inline. Nonetheless, we cut FY20/21 earnings by 16%/10% respectively as we impute the potential losses from the acquisition of Empire.

We maintain our HOLD call with a lower TP of RM3.38 (from RM3.79) as we apply a higher discount at 20% (from 10%) to our SOP-derived TP of RM4.21 based on an EV/EBITDA multiple of 9.0x (+1SD above 3 years mean). The increase in discount is to reflect the lack of concrete near-term turnaround plans for the soon to be acquired Empire.

Source: Hong Leong Investment Bank Research - 30 Aug 2019