1Q16 earnings were fairly inline as the earnings surprise from Genting UK was mitigated by a weaker set of domestic earnings. Having said that, we remain cautious on the UK operations given its volatile VIP-centric earnings profile. Meanwhile, GITP is opening up progressively in 2H16, especially the gaming floor which should help to improve earnings. The stock has contracted 3% YTD; thus, we upgrade it to MARKET PERFORM with a new target price of RM4.32/SoP share.

1Q16 inline. At 22%/24% of house/street’s FY15 estimates, 1Q16 core profit of RM319.1m came within expectations. The core earnings were adjusted including RM138.8m forex translation loss, which was reported in its Investment and Other business segment, mainly due to the recovery of MYR against USD, which resulted in a loss position for its cash and assets held in USD-denomination. No dividend was declared as expected.

Weak home turf operations. 1Q16 core earnings fell 7% QoQ from RM342.8m as revenue slid 3% to RM2.21b from RM2.29b, owing to lower hold percentage for its VIP business in RWG. This affected its Malaysian operations with adjusted EBITDA declining 10% to RM451.5m as revenue contracted 13% to RM1.31b. However, its UK casinos posted strong numbers with adjusted EBITDA soared 3-fold to RM98.6m as revenue jumped 23% to RM528.9m thanks to higher hold percentage for its premiums segment and higher bad debt recovery. Meanwhile, Resort World Birmingham reported loss at EBITDA level of GBP2.6m.

But strong UK numbers. Despite revenue rising 6%, 1Q16 core profit fell 9% YoY from RM349.9m primarily due to the abovementioned weak RWG operations but mitigated by the strong showing at Genting UK. On the other hand, the North American operations reported higher revenue by 12% to RM350.4m due to higher revenue from RWNYC as well as the weakening of MYR against the USD. However, this segment of adjusted EBITDA fell 50% to RM23.2m mainly attributable to cost incurred by the Resort Word Bimini relating to the cessation of Bimini SuperFast cruise ferry operations.

GITP is partly ready in 2H16. While the main attraction, 20th Century Fox World theme park will only be ready by end-2017, the RM10.38b 10-year GITP development is progressively opening up the retail space, restaurants and casino floor in 3Q16, which should be able to contribute to bottom-line. Despite the strong 1Q16, we remain cautious on the VIP-centric UK operations, which could be volatile while the Resort World Birmingham may need some time before showing meaningful results. Meanwhile, RWNYC numbers should be sustainable while Resort World Bimini is looking to be profitable by mid-2016.

Upgrade to MARKET PERFORM. We keep our FY16-FY17 estimates unchanged for now. With the rolling over of valuation base year to CY17, our new price target is now raised slightly to RM4.32/SoP per share from RM4.26/SoP per share previously. We value the local business at 8.4x EBITDA, from 8.2x previously with an unchanged 10-year average while both Genting UK and North American operations are valued at unchanged 20% discount to the Malaysian operations at 6.7x EBITDA. We upgrade GENM to MARKET PERFORM from UNDERPERFORM as its share price has fallen 3% YTD. Risks to our upgraded call are depressed earnings on lower business volume and hold percentage.

Source: Kenanga Research - 25 May 2016