GenM reported 3QFY19 core PATMI of RM357.8m (-0.5% QoQ, -33.7% YoY), which brings the 9MFY19 sum to RM1094.7m (-20.4% YoY). The results were above expectations largely due to higher than expected margins and lower than expected tax rate. We increase our FY19-FY21 forecasts by 9.2%-22.9%, respectively, and upgrade our rating to BUY (TP: RM3.64) in-line with our earnings adjustments and applying a lower holding company discount (of 15% from 20%) as the potential negatives from the acquisition of Empire should be less profound than initially anticipated. A dividend yield of at least 5% should hopefully serve as a support to share price.

Above expectations. GenM reported 3QFY19 core PATMI of RM357.8m (-0.5% QoQ, -33.7% YoY), which brings the 9MFY19 sum to RM1094.7m (-20.4% YoY). This formed 83.7% of our and consensus full year forecasts, respectively. The results were above expectations largely due to higher than expected margins and lower than expected tax rate. No dividends were declared.

QoQ. Both revenue and core PATMI remained flat at RM2.6bn/RM393.8m (+1%/- 0.5%) as slight decrease in margins during 3Q19 was offset by lower tax rate.

YoY. Revenue remained flat (+1.1%) while core PATMI fell -33.7% largely due to higher casino duty coupled with lower net interest from the absence of Mashpee promissory notes.

YTD. Revenue rose 7.3% to RM7964.9m largely due to higher revenue from Malaysia (improved hold percentage from the mid to premium players segment) despite reduction in business volume. Subsequently, core PATMI dropped -20.4% to RM1094.7m largely due to a higher casino duty coupled with lower net interest from the absence of Mashpee promissory notes and higher finance costs from lower qualifying assets eligible for interest capitalisation.

Outlook. With regards to the recent acquisition of Empire, management remains confident on its ability to carry out cost synergies between its US operations. Empire had released their forecasted financials, stating its ability to achieve positive adjusted EBITDA in FY20 (achieved breakeven in the recent 3Q19). In addition, if the refinancing of Empire loans happens, we can expect further cost savings of c.USD25m/annum (assuming interest rates of 7% vis-à-vis current rate of over 10%).

Forecast. We increase FY19-FY21 forecasts by 9.2%-22.9%, respectively, as we impure better margins from the Malaysian operations coupled with a lower effective tax rate (from the utilisation of tax incentives).

Upgrade to BUY, TP: RM3.64. We upgrade our rating to BUY in-line with our earnings adjustments and applying a lower holding company discount (20% to 15%) as the potential negatives from the acquisition of Empire should be less profound than initially anticipated. In addition, the better than expected performance from the Malaysian business alongside a dividend yield of at least 5% should hopefully serve as a support to share price. The stock currently trades at -1SD below its 5-year historical EV/EBITDA mean. All in, our SOP based TP (15% discount) is raised to RM3.64 (from RM3.38).

Source: Hong Leong Investment Bank Research - 5 Dec 2019