Genting Malaysia (GENM) reported a disappointing results, as 9MFY17 core-PATAMI at RM851m (-25% yoy) was below both consensus and our expectation (59% and 57% of our and street’s respective full year forecast). The weak performance is attributed to the lower hold ratio in its VIP segment, despite achieving a double digit growth in volume. Due to the weak results, we are cutting our EPS for FY17E-19E by 5%-17%, and TP to RM5.15. Hold maintained.

The Odds Are Not in the House Favour in 3Q17

Management has attributed the weak set of results to the “win ratio” for its VIPs segment in the Malaysia operation, as adjusted EBITDA for 3QFY17 at RM336m (-22% qoq, -32% yoy) is significantly below the win adjusted EBITDA of RM430m-RM450m. Apart from the decline in revenue, overall EBITDA margin has also narrowed to 25% in 3QFY17, below its historical average of 34-35%. Part of the margin contraction was due to higher cost from the new facilities under the GITP program, while is partly due to the reduction in operation leverage arising from the lower revenue.

Still Bullish About the Outlook

We are still bullish on the outlook for GENM, as the improvement in volume in both the VIP and Mass segment is a good indication that demand remains healthy. There is no change to the management guidance on the opening of the outdoor theme park, which is slated for 2H2018. We believe that as the visitation and gaming volume improves, the volatility in win rates would also reduce. Additional new premium hotel suites will also be opening by end of the month, which is part of the GITP program, catered for the VIP segment.

Maintain HOLD With a Lower TP at RM5.15

We have lowered our TP to RM5.15 as we trimmed our EPS forecast for FY17-19E, due to weaker performance for its Malaysia operation, however we are still keeping our HOLD call on GENM.

Risk to Our Call

Key downside risk to our call include: 1) Further delays to the opening of theme park; 2) Higher than expected cost structure, and 3) Volatility in the VIP customers. Key upside risk to our call include: 1) Higher-than-expected spending per visitation and 2) Stronger improvement in Bimini profitability

Source: Affin Hwang Research - 24 Nov 2017