Period

2Q15/1H15

Actual vs. Expectations

Although the 1H15 core net profit of RM1.19b seem fairly strong making up 55%/62% of our/consensus’ full-year estimates, we deem the results as slightly below our expectation as the casino business is likely to be weaker in 2H15, especially the Singaporean operations.

Dividends

No dividend was declared in 2Q15 which was disappointing as it had always done so every halfyearly. However, management guided that a dividend will be declared in the final quarter of 4Q15. Key

Results

Highlights

Group’s 2Q15 revenue fell 5% QoQ to RM4.17b mainly led by an 8% decline in casino revenue across all geographical segments. 2Q15 core net profit contracted 35% QoQ to RM467.5m from RM718.9m primarily driven by a loss of RM190.8m for investment & other segment at EBITDA from RM318.6m profit in 1Q15. This was due to net forex losses suffered by Genting Singapore plc’s (GENS, NOT RATED) as a result of the volatile currency markets.

GENS posted yet another weak PAT of SGD12.5m in 2Q15 which plunged 86% QoQ due to: (i) SGD95.0m fair value loss on derivative financial instruments, and (ii) SGD84.0m forex translation losses. Meanwhile, RWS continued to post weaker VIP volume, which fell another 9.5% to SGD8.43b on poorer luck factor to 2.1% from 2.5%. RWS also saw its market share for VIP dropping to 47% from 48% in 1Q15. Nonetheless, in MYR term, the adjusted EBITDA rose 33% to RM815.1m due to a tax refund of SGD102.7m (c.RM276.9m).

Genting Malaysia Bhd (GENM, MP; TP: RM4.41) reported a lower 2Q15 core profit which declined 29% QoQ due mainly to: (i) lower business volume across the board, (ii) higher depreciation arising from RWB and, (iii) higher bad debts written off from Genting UK. In general, the Malaysian casino’s earnings were hit by lower VIP business, poorer luck factor and GST impact while the UK operations’ were impacted by bad debts written off, lower VIP volume and higher holdpercentage. The North American operations were encouraging with better RWB earnings with new hotel rooms opening.

Although plantation earnings rebounded 5% QoQ, Genting Plantations Bhd (GENP, MP; TP: RM9.50) saw its 2Q15 core earnings fell another 29% on lower property earnings which plunged 87% as there was a one-off land sales in 1Q15 coupled with the slowdown in the Johor property market. The improved plantation earnings were driven by higher FFB production by 15% to 405mt, which offset the weaker CPO prices of RM2,171/mt from RM2,246/mt and palm kernel of RM1,538/mt from RM1,751/mt previously.

Meanwhile, the Oil & Gas division posted higher earnings with adjusted EBITDA improving 18% to RM53.4m in 2Q15 as revenue rose 14% to RM76.3m, thanks to the contributions from Chengdaoxi Block in China. Elsewhere, the Power unit turned profitable with EBITDA turning in a profit of RM12.2m from a loss of RM0.2m in the preceding quarter due to higher generation by the Jangi Wind Farm which saw segment’s revenue jumping 28% over the quarter.

Outlook

The group’s earnings are likely to face a challenging 2H. In a conference call two weeks ago, the management of GENS guided challenging prospects for its gaming business, especially the high-roller segment from China while the weakening regional currencies could impact its ASEAN clientele as well.

GENM could continue to enjoy stable earnings on the resilient RWG’s earnings albeit with some adverse impact from the GST implementation while the non-gaming earnings are set to soften with the closure of the outdoor theme park since Sep 2013, but the impact is minimal. While RWB which is still in its early day of operations may face challenges with an expectation to break even in 2H15, RWNYC should be able to drive its US-based earnings higher. Nonetheless, the earnings from Genting UK could be volatile given its VIP-centric profile while GENP’s earnings are very much dependent on CPO prices where we are overall neutral as we expect CPO prices to trade range-bound around our FY15 forecast of RM2,200/mt. However, this could be partly offset by decent FFB growth prospects of 6% against sector average of 7%.

Change to Forecasts

We cut FY15-FY17 estimates by 7.5%/5.4%/5.3%%, on the back of: (i) weaker GENS/Genting UK business volume and poorer luck factor, (ii) GST impact on RWG, (iii) change of GENP’s FFB growth to 6%/12%/11% from 15%/24%/5% while there are no changes to CPO/PK/FFB price assumptions, and (iv) long-term SGD/USD/GBP assumption to 2.70/3.80/5.50 from 2.60/3.60/5.00 previously.

Rating

Maintain OUTPERFORM

Valuation

Post earnings revision, changes in currency assumption and target prices for GENM and GENP, and market price for listed units like GENS and LANDMRK (NOT RATED), our new SoP for GENTING is RM11.94/share from RM12.22/share.

Given the high volatility of the current market, we increase the valuation discount as holding company to 30% from 20% previously resulting in our new price target of RM8.36/share, from RM9.78/share.

Risks to Our Call

Poorer luck factor.

Sustained decline in CPO prices.

Source: Kenanga Research - 27 Aug 2015