GenM has announced an equity injection amounting USD40m (RM174.8m) into Empire for the purposes of a refinancing plan and working capital. We remain rather neutral on the news as the amount to be injected is rather small (net gearing to inch up to 0.2x from 0.19x as of 4Q19). Management’s OTP launch target of 3QFY20 will serve as a huge draw factor if the outbreak is contained by then and we believe management should be able to continue declaring a dividend payment of c.18 sen per share. We lower FY20 forecast by -35.1% (FY21: unchanged) as we impute a lower RWG visitor arrivals and contributions from the foreign casinos to reflect the stronger impact of Covid-19. Upgrade to BUY (from Hold) but with a lower SOP-derived TP of RM2.31 (from RM3.13) after updating the forecast changes while imputing a lower EV/EBITDA multiple of 5.5x (-2SD below 10-year mean) towards mid-FY21 EBITDA.

NEWSBREAK

GenM announced an equity injection amounting USD40m (RM174.8m) into Empire via a subscription of preferred stock. The proceeds from the injection will be utilised by Empire for the purposes of a refinancing plan and working capital.

HLIB’s VIEW

Neutral on the news. We are neutral on the news as the amount to be injected is rather small relative to GenM’s balance sheet position. Our pro-forma calculation implies that net gearing would only inch up to 0.2x (from 0.19x as of 4Q19) after the transaction. We are not entirely surprised by this news as Empire had previously disclosed the need for capital injection alongside and/or restructuring of debt (which is currently ongoing).

Recent casino closures. The recent Movement Control order has led to the closure of GenM’s Malaysian operations which includes RWG, RW Awana, RW Kijal, and RW Langkawi. The New York operations which include RWNYC and RW Catskills have also been halted for a minimum of two weeks, until further notice.

On a more positive note, management’s OTP launch target of 3QFY20 will serve as a huge draw factor, in addition to pent up demand if Covid-19 is contained by then. Cash flow wise, we believe management should be able to continue declaring a dividend payment of c.18 sen per share as the decline in operational cash flow will be offset by a decrease in capex by c.RM1bn given that construction is at the tail-end.

Forecast. We lower FY20 forecast by -35.1% (FY21: unchanged) as we impute a lower RWG visitor arrivals and contributions from the foreign casinos to reflect the stronger impact of the outbreak. Upgrade to BUY (from Hold) with a lower TP of RM2.31 (from RM3.13) after updating the forecast changes while imputing a lower EV/EBITDA multiple of 5.5x (-2SD below 10-year mean) towards mid-FY21 EBITDA. Note that our SOP-derived TP also includes a 20% discount to reflect the uncertainty in Covid-19 duration. We believe mid-FY21 valuation is a fairer timeline yardstick to use as FY20 numbers alone would be undervaluing the company’s longer-term positive outlook with the OTP launch being a catalyst, while rolling over to FY21 entirely would be neglecting the near-term impact of the outbreak. Despite our rather conservative estimates and large cut in TP, we feel the YTD share price fall of -42% has somewhat priced in the Covid-19 impact and now offers some buffer to bottom nibble. Share price may potentially remain subdued in the near-term but the attractive dividend yield of 9.4% and positive longer term prospects should hopefully serve as downside support to share price.

Source: Hong Leong Investment Bank Research - 20 Mar 2020