We maintain our BUY call on Genting Malaysia (GENM) with a higher TP of RM5.60, for 17% upside potential. In our view, the key re-rating catalyst for the stock will be the change in investor perceptions, as most view GENM’s core operating assets as mature. As growth should start to kick in by 2018/19, the change in perception should also follow suit.

Perception change is more important than absolute growth

Perception is important in determining the valuation of gaming stocks, as some still enjoy high multiples, despite EBITDA growth that has slowed significantly. Hence, we believe that when the re-energised GENM starts to deliver earnings growth, this will be reflected in its valuation multiple.

GITP is not only about the theme park

While the new 20th Century Fox theme park is certainly the key to attract more visitors to Genting Highland under the GITP program, we think there is more to GITP. The new amenities will not only help to resolve the bottleneck issue at the hilltop but also improve its appeal to the premium mass crowd, which comes with higher spending per visitation.

Foreign ventures are turning around

There has certainly been earnings volatility in both its UK and US operations in recent years, but we believe the situation will improve as management has taken steps to address them. The UK operation has shifted its focus from high-roller VIPs to premium-mass players who don’t require credit facilities; the US operation has also acquired the rights to install another 1,000 slot machines on better commercial terms.

Potentially more value to be unlocked

Despite valuing its core gaming assets at 8-11x EV/EBITDA, we value GENM’s non-core assets at book only, as we are taking a prudent approach given the uncertainty surrounding the prospects of these projects. Currently, they account for 8% of the group’s overall valuation.

Potential downside risks to our call

The key downside risks would be: i) Lower hold rate for its gaming operation, ii) Weaker-than-expected performance of its foreign operation, and iii) Default on its First Light Resort and Casino promissory note, due to an unfavourable court decision in granting the land to the tribe.

Source: Affin Hwang Research - 2 Dec 2016