Period

3Q15/9M15

Actual vs. Expectations

9M15 core net profit of RM1.34b came below expectations, accounting for 68%/70% of house/street’s full-year estimates. The adjustment included RM600m forex gains on foreign currency denominated financial assets at adjusted EBITDA level for investment and other segment.

The weaker-than-expected results were due to disappointing results from the Singaporean operations on sluggish casino volume as well as plantation segment on lower CPO prices.

Dividends

No dividend was declared as expected. Key

Results

Highlights

Group’s 3Q15 revenue rose 11% QoQ to RM4.65b partly due to weakening MYR whereby in MYR terms, revenue from Genting Singapore plc’s (GENS, NOT RATED) reported a 17% jump in revenue whereas in SGD terms it only increased by 10%. Genting Malaysia Bhd (GENM, UP; TP: RM4.26) also posted strong topline on higher volume. However, at adjusted EBITDA level, all business segments reported decline in earnings.

GENS’ results remained weak despite its sole competitor MBS posting recovery in earnings. The reported 3Q15 PAT surged to SGD66.9m from SGD12.5m in 2Q15 mainly due to the net exchange gain of SGD113.2m related to investments. However, its VIP volume fell another 10% to SGD7.62b resulting in VIP market share deteriorating sharply to 40% from 47%.

GENM also reported disappointing results, no thanks to the UK operations which reported losses on bad debts written off while RWB still incurred pre-operating losses, which dragged the overall North American earnings. However, RWG posted a strong 24% QoQ growth in adjusted EBITDA due to higher revenue coupled with lower cost related VIP business.

On the other hand, Genting Plantation Bhd (GENP, UP, TP: RM9.40) saw its 3Q15 core earnings declining another 27% QoQ due to lower plantation earnings as CPO prices fell 6% to RM2,036/mt from RM2,171/mt in 2Q15 while palm kernel prices slid 12% to RM1,359/mt from RM1,538/mt, coupled with higher new planting costs as new planting area rose 55% to 1,400ha. However, its property segment posted improved results on higher sales of commercial properties in Genting Indahpura.

Meanwhile, there was no earnings surprise for the Oil & Gas division while the Power unit posted higher earnings on the back of higher revenue recognised from the higher percentage of completion of 660MW coal-fired Banten Plant in Indonesia while the bottoline was led by higher generation of Jangi Wind Farm.

Outlook

The group’s earnings are likely to face challenges in the near-term. 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. However, we expect better revenue with the contribution from Jurong Hotel.

GENM could continue to enjoy stable earnings from the resilient RWG 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 and expected 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 VIPcentric profile.

GENP’s earnings are very much dependent on CPO prices with the outlook for the sector slightly negative. However, CPO prices are likely to improve in 2016 to RM2,400/mt from RM2,200/mt currently. Nonetheless, the expected dry weather in Sabah and Kalimantan could hit FFB production in 1Q16 and 3Q16. In view of this, we expect the combined Malaysia and Indonesia FFB growth to reduce to 8% from 12% previously.

Change to Forecasts

We cut our FY15/FY16/FY17 estimates by 11%/10%7%, on the back of: (i) weaker GENS/Genting UK business volume and poorer luck factor as well as lower estimates for American operations, and (ii) lower FFB growth assumption.

Rating

Maintain OUTPERFORM

Valuation

Post earnings revision, we revised our target prices for GENM and GENP, and market price for listed units like GENS and LANDMRK (NOT RATED), our new SoP for GENTING is RM12.18/share from RM12.22/share. With unchanged holding company discount of 30%, our new price target is now RM8.52/share, from RM9.78/share.

Although 3Q15 results were below expectations, GENTING still looks attractive for its deep valuation.

Risks to Our Call

Poorer luck factor.

Sustained decline in CPO prices.

Source: Kenanga Research - 27 Nov 2015