Genting Malaysia (GENM) announced that they would be acquiring a c. 35% stake in Empire Resorts (NYNY US, Non-rated) from a company (KH) related to its main shareholder for US$128.6m (or RM538.8m). Subsequently, both companies will then set up a JV to privatise NYNY. Post the privatisation, GENM aims to hold a 49% effective stake in NYNY. This deal might be viewed negatively by GENM’s minority shareholders, as it does not require the latter’s approval while NYNY is currently still loss making. Maintain HOLD with an unchanged TP at RM3.40.

Might This Deal be Too Controversial?

We believe that the deal might cast a negative light on GENM’s corporate governance issue again, as investors might view the deal as bailing out KH, which is the main shareholder of NYNY. Although NYNY owns 1 of the 4 casino licenses (Resort World Catskill) in upstate New York, NYNY continues to be loss making. In our view, there is a likelihood that GENM will need to inject fresh equity post the acquisition, to reduce the overall debt of US$570m, as the interest cost alone accounts for more than 50% of the losses incurred in 1Q19. Its operating cash flow is also in the negative territory.

What Synergies Can GENM Gain From the Deal?

Management believes that they could generate both revenue and synergies from the acquisition. We believe that some of the cost savings are likely to be achievable, such as shared A&P expenses, membership programs, management cost etc. However, it is likely to be challenging for GENM to cross-sell their new offering to their existing customer base, as the distance between Resort World New York (RWNY) and RW Catskill is around 2- hours drive apart, in our view. All 4 upstate casinos have shown some improvement recently, but their numbers are still below the initial revenue projections. The limitation on expanding sport betting to mobile, also limits its potential upside.

Maintain HOLD With An Unchanged TP of RM3.40

We are keeping our SOTP-based TP unchanged at RM3.40, while maintaining our HOLD call. We have yet to incorporate the acquisition into our numbers, as the deal is still subject to regulatory approval.

Source: Affin Hwang Research - 7 Aug 2019