GenM struggled to return to profitability in 1Q22 largely due to a supply-demand mismatch in RWG as it ramped up operation capacity while demand fell due to rising Omicron cases. Nonetheless, looking ahead, there are plenty of positives that will anchor the recovery of RWG for the rest of FY22, including (i) the country’s progression to endemicity; (ii) borders reopening; (iii) the weak currency which augurs well for local and foreign visitations; (iv) opening of SkyWorlds which attracts a new market segment; and (v) EPF withdrawal scheme which boosts leisure spending. Maintain BUY with TP of RM3.91.

1Q22 results recap. GenM struggled to return to profitability in 1Q22 with earnings come in below both ours and consensus expectations. The underperformance was mainly impacted by lower visitations to RWG as a result of the rising Omicron wave. At the same time, this also coincided with the capacity ramp up and opening of SkyWorlds theme park which resulted in higher operating expenses. Consequently, this had resulted in an unfortunate supply-demand mismatch in the quarter.

RWG continues to ramp up operations in 2Q22. As at 31 Mar 2022, RWG had opened 5.2k hotel rooms (or only half of its capacity out of total 10.5k rooms) with average occupancy rate at 88% in 1Q22. GenM indicated that it is progressively ramping up capacity (hotels, casino and theme park) in 2Q22. From our ground check, casino capacity has increased as the restriction on the number of players per table had been lifted while the footfalls observed in the casino were also very encouraging. We believe visitations to RWG should improve meaningfully in 2Q22 due to (i) the subsiding Omicron wave bolstering the return of visitors; (ii) Malaysia moving into endemicity which allows RWG to ease its social restrictions and increase capacity; (iii) EPF withdrawal scheme in Apr which augurs well for leisure spending; (iv) long Raya weekend (RWG was flocked with visitors and overcrowded over that period); and (v) full quarter contribution from the newly opened SkyWorlds theme park.

RWG recovery momentum should continue in 2H22 as the resumption of more hotel operations will increase hotel revenues, length of stay and spending in RWG. With borders reopened since 1 Apr, we should see gradual return of foreign visitors to RWG. As of 21 June, Malaysia has already surpassed the full year target of 2m incoming tourist arrivals. Although this is only c.17% of the tourist arrivals compared to the same period in 2019 (pre-pandemic), we note that this is a commendable figure given that it is still early days since the border reopened. Foreign tourist arrival should improve further as more countries relax their border restrictions. Furthermore, the current weak local currency should also give a twin boost to RWG through (i) increase in foreign tourists and mass-market gamblers as RWG becomes a cheaper gaming and tourism destination vs. its regional peers (e.g. Singapore); and (ii) increase in local visitations as locals are likely to prefer domestic tourism due to weak currency.

SkyWorlds – tapping into a large market. Prior to the opening of the theme park, the main attraction in RWG was its casino which tends to attract adult non-Muslim crowds. The opening of SkyWorlds allows RWG to attract a large and previously untapped Muslim market which represents c.63% of Malaysia population. GenM will be able to harness the full potential of SkyWorlds in 2H22 as (i) all the attractions within SkyWorlds will be opened; (ii) the capacity increase from the easing of restrictions; and (iii) the reopening of the Genting SkyWorlds Hotel within the theme park. The increased footfall to the theme park should have a positive spillover effect to the other venues in RWG.

Improving balance sheet. The completion of SkyWorlds marked the end of a major capex cycle for GenM (likely no major debt raising in FY22), while the anticipated earnings recovery should also generate positive cash flow to the group. As such, this should improve the group’s net gearing level (68.9% as at 1Q22) which we believe is just in time as this will ease its financial burden under the current interest rate upcycle environment.

Is there further upside to share price? At current share price, investors may be concerned if valuation is rich as GenM is already trading close to pre-pandemic level (103.2% compared to the average 2019 price level). Nonetheless, we highlight that the price level in 2019 was dampened by negative sentiment on the company with regards to (i) the casino duty hike to 35% from 25% which took effect in FY19; and (ii) the acquisition of loss-making Empire Resorts (share price tumbled -11.9% in a day after the announcement). Furthermore, we also highlight that compared to pre-pandemic, GenM currently has (i) the addition of SkyWorlds theme park; (ii) improved operating performance from US and UK, with their 1Q22 EBITDA at 207% and 118% of 1Q19 figures respectively; and (iii) Empire’s narrowing losses and brightening prospects with the operating of mobile sports betting and the upcoming opening of RW Hudson Valley.

Forecast. Unchanged.

Maintain BUY with unchanged TP of RM3.91 based on 5% discount to SOP-derived value of RM4.12. Despite the results disappointment in 1Q22, we believe that investors will look ahead as RWG scales up its capacity and as visitations improve. We continue to like GenM as we view RWG as one the prime beneficiaries with borders reopening, especially with the addition of theme park that complements its gaming attraction, making it an attractive tourism spot that could capture visitors from all walks of life. Additionally, the current weak local currency is also a boon to RWG for reasons highlighted above.

Source: Hong Leong Investment Bank Research - 5 Jul 2022