We are downgrading GENTING to MARKET PERFORM as the strong YTD rally in its share prices has reached our fair valuation. The stock is an index outperformer which has risen 34% YTD, narrowing its discount to SoP to merely 23% vs. the 10-year discount average of 30%. However, there is no firm earnings catalyst in the immediate-term. The meaningful impact from the redevelopment of Genting Highlands is only expected in 2018 while the recovery of Macau casino revenue in the past three months, which was from a low-base, is too early to indicate a similar recovery in the Singaporean market. Likewise, the recent recovery in CPO prices is likely to be only a near-term spurt as we expect a weaker 2H2016. All these are not supportive of a valuation re-rating. Our new price target is now RM10.04/share, from RM9.74/share, which is based on unchanged 20% discount to its SoP valuation of RM12.54/share. Risk to our downgrading would be the successful listing of TauRx, which we believe it is still too early, with could add RM3.31/share to its SoP valuation.

A rare top index gainer. GENTING is the top gainer under the FBMKLCI stable with a remarkable YTD gain of 33.51% compared to the key index’s gain of only 1.48%. We have not seen such a strong performance from GENTING in a long time since 2009/2010 when Resorts World Sentosa commenced operations in Feb 2010. In fact, GENTING was one of the top losers in the past two years that saw its share prices contracting 13.55% and 17.25% in 2014 and 2015, respectively, as against the barometer index’s -5.66% and -3.90% over the period. The recent rally in its share prices was in tandem with the rally in Macau gaming stocks, which rose >15% YTD on average on improved casino revenue data. However, the significant factor to GENTING could be highly on account of a potential IPO of its 20.7%-owned TauRx Pharmaceuticals.

Macau gaming stocks rebounded. The world’s largest casino market Macau has been gone through a tough time in the past two years due to effects from the Chinese Government crimping down on corruptions and a slowdown in Chinese economy. This resulted in industry gross gaming revenue (GGR) plunging 56.7% from its peak of MOP38.01b in Feb 2014 to the recent low of MOP16.43b in Nov 2015. This led to Macau gaming stocks plunging 69% on average over 2014-2015. However, since then, GGR had registered three months of MoM growth to MOP19.52b in Feb 2016. This has propelled buying interests in the gaming stocks, driving stock prices higher by >15% in the past three months.

Value accretion from the non-gaming venture finally? It was first reported in January that the Singapore-based TauRx is planning an IPO in Nasdaq next year with a potential valuation of USD15b, which could be a major catalyst to GENTING should it materialise. In mid-March, it was quoted in the press that TauRx plans to present results from ongoing final human trials on its experimental Alzheimer’s drug LMTX as early as July. So far, there is no drug that can treat Alzheimer and there has been a string of failed experiments from other drug companies. We believe that these two pieces of news are the major catalysts to the recent share price rally.

Time to take a breather; downgrade to MP. GENTING has risen 34% YTD, narrowing the share price discount to its SoP valuation to 23% from c.40% just at the beginning of the year and its 10-year discount average of c.30%. We believe it is time to review the stock valuation which in our opinion is close to its fair valuation. There is no immediate firm earnings catalyst at the moment. The recovery in Macau casino revenue in the past three months, which was from a low-base, may not be a fair indication that a similar recovery will happen in Singapore, which is GENTING’s major earnings contributing market. Meanwhile, it is still too early to speculate on the LMTX test and the listing of TauRx. As such, we decided to keep our 20% discount to SoP valuation with a new price target of RM10.04/share from RM9.74/share as SoP rose to RM12.54/share from RM12.18/share previously. We cut the stock to MARKET PERFORM from OUTPERFORM previously. Risk to our call is the listing of TauRx, which could translate into RM3.31/SoP share should the IPO materialise.

Source: Kenanga Research - 1 Apr 2016