GenM reported 4QFY19 core PATMI of RM216.2m (-39.6% QoQ, -66.5% YoY), which brings the FY19 sum to RM1,311m (-35.1% YoY). The results were below expectations largely due to lower than expected margins. FY20 will be a challenging year given the growing concerns over the Covid-19 outbreak; this month saw a visitor arrival decline of c.-15%, YoY. We cut FY20 forecast by - 18.7% as we impute a lower visitor arrival alongside lower margins to reflect the impact of the outbreak. We downgrade our rating to HOLD, TP: RM3.13, in-line with our earnings adjustments alongside a higher discount at 20% (from 15%) of our SOP based valuation. We will revisit our valuation upon further updates on the trend of visitor arrivals and expect share price to remain subdued in the meantime.

Below expectations. GenM reported 4QFY19 core PATMI of RM216.2m (-39.6% QoQ, -66.5% YoY), which brings the FY19 sum to RM1,311m (-35.1% YoY). This formed 92% and 94% of our and consensus full year forecasts, respectively. The results shortfall was due to lower than expected margins. FY19 core PATMI sum has been arrived after excluding +RM80.7m of EIs, which mainly includes +RM256m of gains on disposal, -RM81.7m of impairment and termination costs, and -RM67.6m of pre-operating expenses.

Dividend. Declared special dividend of 9 sen per share (going ex on 13 Mar) and final dividend of 5 sen per share, bringing FY19 to 20 sen (FY18: 19 sen) per share.

QoQ/YoY. Core EBITDA fell -20.6%/-26.3% to RM551.4m mainly due to the casino duty rate hike coupled with higher payroll costs and operating expenses in US and Bahamas. Subsequently, core PATMI dropped -39.6%/-66.5% to RM216.2m in tandem and was further hit by the share of losses from the Empire acquisition.

YTD. FY19 recorded a drop of -7.3% in core EBITDA RM2,641.4m largely due to the higher casino duty rate hike which was mitigated by a higher hold percentage in the mid to premium players segment. Core PATMI decreased -35.1% to RM1,311m due to the aforementioned reasons in addition to lower net interest (from the absence of Mashpee promissory notes), higher depreciation and an effective tax rate.

Outlook. FY20 will be a challenging year given the growing concerns over the Covid- 19 outbreak. As the duration of this outbreak remains uncertain, we reckon citizens will likely avoid crowded places for the time being. This has been apparent in the recent month which recorded a visitor arrival decline of c.-17%, YoY. We also expect margins to slightly compress stemming from more promotional offers given to entice visitors and may also end up attracting visitors with less spending power on average. Assuming the outbreak looms into 2H20, the OTP launch (still targeted to launch in 3Q20) may not be sufficient to draw in the initially anticipated crowd.

Forecast. We lower FY20 forecast by -18.7% (FY21: unchanged) as we impute a lower visitor arrival alongside lower margins to reflect the impact of the outbreak.

Downgrade to HOLD (from Buy), TP: RM3.13 (from TP: RM3.64). We downgrade our rating in-line with our earnings adjustments alongside a higher discount at 20% (from 15%) of our SOP based valuation. We impute a higher discount to reflect the uncertainty in duration of the Covid-19 impact towards visitor arrival. We will revisit our valuation upon further updates on the trend of visitor arrivals and expect share price to remain subdued for the time being. On the flipside, the dividend yield of 6% and positive long-term prospects should serve as downside support to share price.

Source: Hong Leong Investment Bank Research - 28 Feb 2020