A good set of 2Q16 earnings which saw solid numbers across all geographical areas, thanks to resilient top line growth. UK operations reported 2nd consecutive quarter of strong earnings after a successful change in business strategy and we want to gauge its sustainability given its volatile VIP-centric earnings profile. Meanwhile, with GITP opening up progressively in 2H16, we may see some earnings upside. However, we maintain our MARKET PERFORM call with unchanged price target of RM4.32/SoP share.

2Q16 in line. At 52% of our FY16 estimates, 1H16 core profit of RM762.1m came within our expectation but beat market expectations at 57% of consensus’ FY16 estimate. The core earnings were adjusted, including a RM46.1m forex translation gain in 2Q16 and RM138.8m forex translation loss, which were reported in its investment and other business segment, mainly due to the weakening of MYR in 2Q16 and a stronger MYR against USD in 1Q16 resulted in a gain position in 2Q16 and a loss position in 1Q16 for its cash and assets held in USD-denomination. First interim NDPS of 3.0 sen was declared in 2Q16 (ex-date: 28 Sep; payment date: 24 Oct) which was higher than 2.8 sen paid in 2Q15.

A good sequential growth. 2Q16 core earnings jumped 39% QoQ to RM443.0m from RM319.1m with top line inching up a meagre 1.0%. This was mainly due to lower taxation of RM46.8m (effective tax rate of 9%) which was adjusted for a higher taxation of RM118.0m (45%) in 1Q16. Nonetheless, the underlying operations were commendable where the Malaysian unit reported higher adjusted EBITDA by 5% on higher hold percentage and lower opex while North American unit jumped 123% as RWNCY incurred lower opex while losses at Bahamas operations were reduced. Despite lower revenue, the adjusted EBITDA for the UK unit remained solid at RM92.9m as compared to RM98.6m previously.

Sold numbers from last year. On a YoY comparison, there was a broadbase solid improvement from all geographical units that boosted its 2Q16 earnings by 79% from RM247.5m in 2Q15. The 12% earnings hike in local operations was led by higher hold percentage and lower opex for mid-topremium segment while a change in business strategy turned around the previously loss-making UK units to EBITDA of RM92.9m from a loss of RM100.0m. Higher business volume and the reduced losses at Resort World Bimini helped to push the North America unit’s earnings higher by 37%. Likewise, the YTD 1H16 earnings leapt 28% to RM762.1m from RM597.4m in 1H15 for the similar reasons mentioned above.

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 striving to be profitable by mid-2016.

Maintain MARKET PERFORM. We keep our FY16-FY17 estimates unchanged for now as the GITP is still at the early stage of operations in 2H16. We also keep our MARKET PERFORM call at target price of RM4.32/SoP per share unchanged for now. Downside risks to our call are depressed earnings on lower business volume and hold percentage.

Source: Kenanga Research - 26 Aug 2016