We believe that Genting Malaysia (GENM) reported a decent set of numbers, as adjusted EBITDA for 2018 of RM2,873m (+30% yoy) fell within our and consensus expectations, constituting 105% and 101% of our respective forecast. While there is uncertainty heading into 2019, there is a high chance that the GENM could positively surprise street earnings expectations post the substantial downgrades in Nov/Dec 2018. We are keeping our TP at RM3.80 and BUY call unchanged due to its undemanding valuation.

Preparing for the New Challenges in 2019

Management was not able to provide any operational details on the impact of the gaming tax hike since Jan’19, but has mentioned that they are reexamining both their capex and opex to lower the negative impact on margin. We believe that GENM would need to sacrifice some margins to maintain its competitiveness in the VIP segment, but there is more leeway for the mass-market segment, hence EBITDA margin is unlikely to be at the worst case scenario of 25%. We are forecasting margin for the Malaysia operation to narrow to around 28% from the 35%.

Working on the Indoor Facilities to Keep Visitation Growing

While there are no concrete plans on the opening of its outdoor theme park due to the ongoing lawsuit, management will now focus on completing the indoor theme park and introduce new facilities to support the current visitation growth momentum. Although the momentum has slowed in 4Q, we do agree with management view that the incremental growth from the new indoor theme park is not fully reflected in the numbers yet. We believe these new facilities will not only help to attract younger crowd but also reduce its dependency on gaming revenue.

Maintain BUY With An Unchanged TP of RM3.80

We make some minor tweaks to our 19-20E forecast, but keep our TP at RM3.80 and buy call unchanged. We have also revised our DPS payout higher, to incorporate the recent higher payouts for the past 2 years. Key downside risks 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 - 28 Feb 2019