Genting Malaysia (GENM) reported a surprisingly strong set of numbers; adjusted 1Q19 EBITDA of RM684m (+12.6% yoy) is above consensus and our expectations, constituting 28% of consensus and our full-year forecasts. The better-than-expected performance was driven by an exceptionally high hold percentage in the VIP segment, with revenue growing by 26% yoy. Normalising the luck factor, the performance is still largely in line with expectations, hence we are keeping our TP at RM3.80 and BUY call unchanged.

Drop in Overall Volume Is Not Surprising

Although revenue for VIP is up by 26% yoy, volume for the segment is down by a double-digit percentage, as GENM has cut back on the incentives/rebates for its players post the increase in gaming tax. The increase in revenue was mainly driven by a favourable luck factor. We are keeping our EBITDA margin forecast for the Malaysia segment unchanged at around 28% (worst-case scenario is at 25%), as we believe that the cost rationalization measures implemented by GENM will materialise in the coming quarters. The cost savings are important, as it currently has limited profit margin to offer as rebates to its VIP clients.

Visitation Continues to Pick Up Pace

Overall visitation at the Highlands is up 11% yoy to 6m visitors in 1Q19, which has been the main driver for the non-gaming revenue of its Malaysian operation. As there is no timeline set for the opening of the outdoor theme park, management is focusing on improving the offering of its indoor theme park and will be adding more rides by mid-2019. Due to strong growth in visitation, the overall room rate at the Highlands has more than doubled to RM210/night; 71% of visitations are currently from day-trippers.

Maintain BUY With An Unchanged TP of RM3.80

We raise our 2019E earnings to factor in the better 1Q performance, but keep our TP at RM3.80 and BUY call unchanged. Key downside risks to our call include: 1) intensifying competition from other regional casinos; 2) higher-than-expected cost structure; and 3) volatility in the VIP customers.

Source: Affin Hwang Research - 24 May 2019