Genting Malaysia (GENM) reported a headline loss of RM740m for 9M18, due to the RM1.8bn impairment on its Mashpee note investment. Excluding the one-offs, 9M18 core PATAMI of RM1,224m (+45% yoy) is within both our and consensus expectations. However, we have reduced our earnings for FY19-20E, as we assume a delay in the opening of the outdoor theme park till 2020. Despite lowering our SOTP-based TP to RM3.80, we believe that the share price correction is overdone, hence upgrading GENM call to a BUY.

Cutting Cost to Preserve Margins

Management didn’t provide any guidance on the EBITDA margin post the upcoming gaming tax hike but did alluded that current margins at 35% (for 9M18) is not sustainable. GENM will now have to undergo a cost rationalisation program to lower its cost, while seeking a balance between margins and volume. As such, we have lowered our margin forecast for 2019/20 to 28% from 32% previously, as we believe that GENM will need to sacrifice on its margins to maintain its competitiveness in the VIP market segment. The government has raised the gaming tax on net wins from the current 25% to 35% starting 1 Jan 2019.

Visitation Forecast Likely to Take a Hit

Although management didn’t provide any colour on its plan for the outdoor theme park (due to the impending law suit against Fox & Disney), we believe that GENM will still work on the outdoor theme park, but the opening date is likely to be delay beyond the planned 1H19. As such we have lowered our visitation rate forecast, with the assumption that an outdoor theme park will open its doors in 2020. In our view, even without a branded theme park, visitation growth is still sustainable, albeit not as strong as previously forecasted. As an indication, prior to the refurbishment, the “old” theme park managed to attract c. 2m-2.5m visitors a year. Overall visitation for the 9M18 is up 14% yoy, even without the presence of the outdoor theme park.

Upgrade to BUY With a Lower TP of RM3.80

We have cut our earnings forecast for FY19-20E by 31%-33% to factor in the latest development in terms of the visitation forecast and margins. We have also lowered our SOTP-based 12-month TP to RM3.80, but upgrade our call to BUY from Hold, as we believe that the share price correction is overdone.

Risks to Our Call

Key downside risk to our call include: 1) Impairments related to investment made on the theme park; 2) Higher than expected cost structure, and 3) Volatility in the VIP customers

Source: Affin Hwang Research - 3 Dec 2018