A leverage play on its improving subsidiaries

After revisiting our RNAVs at each of Genting Berhad’s (GENT) listed subsidiaries, we raise our TP to RM10.97, for 36% upside potential, and hence, upgrade the stock to BUY (from HOLD). We believe GENT is a leverage play for investors seeking exposure to its other listed subsidiaries, as the market cap discount between GENT and its listed subsidiaries has widened to over +1SD above its historical average.

Narrowing of the discount accounts for half the upside to our new TP

In our view, the current holding-company discount towards the RNAV at 28.5% is too wide to be ignored, as it is currently at +1SD above its historical average. We attribute the spike in the discount to the increase in volatility in Genting Singapore’s share price. Assuming a narrowing of the discount back to its past-6-year average of 16.2%, this would offer close to 17% upside from the current share price (half the upside to our TP).

Positive news flow likely as short-term catalysts

The share price of Genting Berhad is likely to be impacted by both news on the Japan casino bids and the progress of GITP at Genting Highlands. News on the Japan casino bids will likely have the bigger impact on GENT, as we believe the Japan gaming market could potentially be the second-largest gaming market in Asia behind Macau. This news flow will likely increase the volatility on the GENS and GENM share prices, which in turn would influence the GENT holding-company discount.

Improving results from its listed subsidiaries

There is no doubt in our view that the Genting Berhad share price will also be impacted by the financial performance of its listed subsidiaries, as Genting Berhad’s cash flow is dependent on the casino-management fee from GENM and also the dividends paid from the 3 listed subsidiaries. We forecast GENM, GENS and GENP to post EPS CAGRs of 10-55% over 2016-18E, after a relatively disappointing 2014 and 2015.

Earnings revisions

On a weaker-than-expected performance at GENS and GENM, we lower our 2016-17E earnings, but raise them in 2018E on an expected pick up.

Risks to our call

Key downside risks would be: i) Higher-than-expected capex requirements for its Las Vegas project, ii) unfavourable news flow on the Japan casino bill, and iii) weaker-than-expected results at its listed subsidiaries.

Source: Affin Hwang Research - 13 Dec 2016