• We downgrade Genting Berhad (GENT) from Buy to HOLD, after cutting our TP to RM3.01 from RM4.20, as we lower the fair value of its subsidiaries, while also raising the holding co discount.
• We see limited catalysts for the share price over the near term, given that an earnings recovery remains volatile as the second/third wave of COVID- 19 has prolonged a recovery.
• We believe that GENT could also be replaced as an FBMKLCI Index component, which could be a near-term de-rating catalyst for the stock.

Off the Worst But Still Far From Normal

We have revised our earnings estimates for 20/21/22E by +10.2%/-6.4%/-0.5% as we have become less optimistic on a recovery, given that the recent spike in COVID- 19 cases will deter local visitation and also push back plans to reopen borders for foreign tourists. We believe that the social distancing measures will remain in place at least until 6-12 months after a vaccine is publicly available. Although its casinos in Malaysia and Singapore have seen increases in local visitation post the reopening, we believe that this is still insufficient to compensate for the lack of foreign tourists, as foreign tourists contributed 25% and 75% of the total visitation in previous years.

Gaming Expenses Also a Discretionary Expense

Apart from lowering our visitation forecasts for both GENM and GENS, we have lowered the overall spending per visitation too, as we believe that the overall spending on gaming activities is likely to be lower due to the challenging global economic outlook. The extension of credit to VIP players might also be more stringent, as a weaker economic outlook might increase the risk of default, in our view. However, as GENS relies heavily on credit extension to attract VIP players, GENS might need to take on higher risk to speed up the recovery of its VIP segment. Nevertheless, the return of VIP is also dependent on the reopening of borders for general tourists.

GENT and GENM Might Lose Their Place in the FBMKLCI Index

There also lies the possibility that both Genting Berhad (GENT) and Genting Malaysia (GENM MK; RM2.03, Sell) might be dropped from the FBMKLCI Index by year end, due to the decline in their market capitalisations. Based on their current market caps, GENM is currently ranked at 35th place, while GENT is ranked at 34th place, and if they do fall below the 35th place, they will be replaced by other candidates, and it could be a de-rating catalyst for the stock.

Source: Affin Hwang Research - 18 Oct 2020