GenM reported 1QFY20 core LATMI of -RM1.8m (-100.8% QoQ, -100.5% YoY). We deem it below expectations as we were initially expecting 1QFY20 to remain profitable. 1QFY20 which recorded a visitor arrival decline of c.-31%, YoY and the OTP launch has been postponed to 2H21. We forecast FY20 to record losses of -RM331m (from RM630.1m) and lower FY21 forecasts by -7.5% as we impute lower visitor arrivals post-CMCO alongside lower margins to reflect the impact of the outbreak. We introduce FY22 core PATMI forecast at RM1,356.7m. We downgrade our rating to HOLD (from Buy) with a marginally lower TP of RM2.30 as we roll forward our valuation to FY21.

Below expectations. GenM reported 1QFY20 core LATMI of -RM1.8m (-100.8% QoQ, -100.5% YoY). The results are not comparable to our and consensus full year forecasts in terms of % due to the expectation of losses in 2QFY20 from the closure of operations. Nonetheless, we deem it below expectations largely due to lower than expected contributions from its gaming operations and we were initially expecting 1QFY20 to remain profitable. 1QFY20 core PATMI sum has been arrived after excluding -RM416m of EIs, which mainly includes -RM346m of impairments in its overseas operations, -RM20m of pre-operating expenses, and -RM46m of one-off refinancing costs. No dividends were declared.

QoQ/YoY. Core EBITDA fell -35.5%/-48% to RM355.4m from the decrease in contributions from all its operations due to the Covid-19 outbreak. Subsequently, 1QFY20 recorded a core LATMI (from core PATMI RM216.2m/RM377.3m) of - RM1.8m as it was further hit by increased depreciation expense, interest expense, and a full-quarter share of losses from Empire Resorts.

Extended closure. To recap, RWG began closing its operations since the MCO first commenced on 18 Mar and has remained closed under the CMCO which ends on 9 June. However, we remain wary on the actual opening date as we do not discount the possibility of government further extending RWG’s casino closure to curb the spread of Covid-19. It was also reported on The Edge that GenM is believed to likely retrench 10-20% of their staff force (currently c.20k) as part of a cost-cutting exercise. Note that FY19 recorded employee benefits expense of c.RM2.3bn. Management has declined to further comment on the matter but we can expect a decrease in manpower due to the likelihood of decrease in scale of operations post-MCO. On the international front, both the US and UK operations have also ceased operations until further notice.

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 1QFY20 whereby RWG’s hilltop recorded a visitor arrival decline of c.-31%, YoY (Figure #3). 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. With regards to the OTP, we gather that the launching is unfortunately postponed to 2H21 (from 3Q20 previously). We now expect RWG to potentially register a YoY visitor decline of -50% for FY20 as we expect Covid-19 fears to remain post-CMCO. We have also reduced our FY20 dividend assumption to 14 sen (from 18 sen), which is still relatively high to help fund parent-co GenT’s capex for Resorts World Las Vegas.

Forecast. We forecast FY20 to record losses of -RM331m (from RM630.1m) and lower FY21 forecasts by -7.5% as we impute lower visitor arrivals post-MCO alongside lower margins to reflect the impact of the outbreak. We introduce FY22 core PATMI forecast at RM1,356.7m.

Source: Hong Leong Investment Bank Research - 28 May 2020