Period  2Q14/1H14

Actual vs. Expectations 2Q14 core net profit of RM257.0m brought YTD 1H14 earnings to RM618.3m which came below expectations as it only accounted for 40%/38% of house/street full-year FY14 estimates. The disappointing results were mainly attributable to poor luck factors at RWG and UK casinos.

Dividends  3 sen NDPS was declared in 2Q14 (ex-date: 26 Sep; payment date: 22 Oct) which is lower than the 3.2 sen paid in 2Q13.

Key Results Highlights  The 2Q14 core profit plunged 29% QoQ to RM257.0m from RM361.3m previously due to lower hold percentage for VIP business in both Malaysian as well as UK casino operations. The UK unit was also affected by higher bad debts written off.

 The RWG reported adjusted EBITDA, which dropped 11% QoQ to RM446.4m on the back of 6% dip in topline which was mainly due to poor luck factor. Without the decline in hold percentage, 2Q14 revenue and adjusted EBITDA would have dropped only 4% and 5%, respectively.

 In fact, the UK unit reported a loss of RM66.1m at the adjusted EBITDA level from profit of RM76.4m as the London casinos were loss-making due to weaker hold percentage. The overall losses were also partly attributed to higher bad debts written off.

 However, the North America operations shown improvement in the past two quarter with 2Q14 EBITDA almost doubled to RM28.2m from RM14.7m in 1Q14 as losses at RWB was reduced. RWNYC reported higher business volume with average daily win per machine rising to c.USD449 from c.USD432.

Outlook  The RM5b 10-year refurbishment program will be a structural change to its home turf operation and act as an earnings catalyst from 2016 onwards. On the other hand, the yield management initiative should help to improve earnings while the RWNYC numbers should be sustainable. However, the UK operations could continue to see tougher times due to its VIPcentric nature.

Change to Forecasts We have cut FY14-FY15 estimates by 13%-5% after adjusting for poorer luck factors at RWG and the UK operations.

Rating Downgrade to UNDERPERFORM from MARKET PERFORM

Valuation  Share price had risen 5% in the past two days, surpassing our target price.

 Post earnings revision, our new target price is RM4.41/SoP share from RM4.57/SoP share.

Risks to Our Call  Better luck factor.

Source: Kenanga