The group reported earnings which were below both consensus and our full-year estimates, owing largely to weaker hold percentages for both its Malaysian and Singaporean gaming operations. We have toned down our earnings forecast while revising downwards our SOP FV for Genting Bhd from RM12.30 to RM11.62 after nudging down our FVs for Genting Singapore, Genting Malaysia and Genting Plantation. Maintain BUY with a revised FV of RM11.62.
Slightly below.Genting Bhd's annualized 1QFY12 core earnings made up 21.9% and 21.5% of consensus and our full-year forecasts respectively. Core EBITDA and earnings declined 25.3% and 37.2% y-o-y respectively.
All segments report lower performance. Given that gaming contributes to a significant 86% of the group's operating earnings, its performance was naturally dragged down by its two key operating units ' Genting Malaysia and Genting Singapore. The group's lower-than-expected core earnings were essentially a reflection of: (i) Genting Singapore's 33.2% decline in 1Q12 core earnings as a result of a 14% drop in VIP volume and a lower VIP hold percentage of 3.4% vs 3.8% in 1Q11, and (ii) a 19.8% decline in Genting Malaysia's core earnings as a result of lower hold percentages from the Malaysian gaming business, lumpy RM39.6m gaming bad debt provisions from its UK casino operations and higher promotional expenses from Resorts World at New York. That said, the 28% y-o-y decline in Genting Plantations' 1QFY12 earnings on the back of higher than expected fertilizer and labor costs also contributed to the drag in overall group earnings. The power division was also not spared, reporting a 40% y-o-y decline in earnings as a result of lower power dispatch by its Meizhou Wan power plant in China which could be partially attributed to the high base effect of 1QFY11 that incorporated a lumpy fuel pass-through compensation.
Medium-term notes explained. The group had recently announced the establishment of a 10-year medium-term notes (MTN) with an aggregate nominal value of up to RM2.0bn. Management indicated that this was intended to lock in relatively attractive long-term financing costs without really allocating the funds to any immediate-term investments, apart from utilizing a portion of the amount raised to redeem part of its existing USD314m bonds expiring in 2014. We believe that the group will ultimately allocate a large portion of the funds raised to support future gaming ventures of its subsidiaries, which are expected to be significant given the scale of the CAPEX required for integrated resorts. We note that its CAPEX-intensive power business could be largely project financed against the long-term contractual cash flows of the IPP agreements. More importantly, with the group's net gearing remaining relatively healthy at 10.3% even after raising the RM2bn MTN, it can well afford to digest higher gearing levels while optimizing its balance sheet to drive a more aggressive growth plan.