We see value re-emerge on GENTING following the share price correction of 16% in the past five months despite the disappointing 2Q16 results. On the other hand, we believe downside to its weak Singaporean earnings, which are already at the historical low, could be cushioned by the resilient GENM earnings, especially with the GITP scheduled to start in 2H16. Thus, we upgrade GENTING to OUTPERFORM with new price target of RM9.32/share.

2Q16 below. At 45% of our FY16 estimates, 1H16 core earnings of RM915.2m fell short of our expectations given the dismay GENS’ (Not Rated) earnings while the recovery of plantations earnings were lower than expected due to weaker FFB volume for the Indonesian operations. However, the results were within market expectations at 51% of consensus forecast. There was no dividend declared in 2Q16, which was not a surprise to us as it only declared the first and final dividend in 4Q15 last year.

Poor Singapore earnings thumped sequential results. 2Q16 core net profit plummeted 33% QoQ to RM367.6m from RM547.5m while revenue declined 10% over the same period. This was attributable to the weak GENS’ (Not Rated) earnings where its EBITDA in MYR term of RM370.0m was the lowest since 1Q10 on declining high-roller volume and luck factor. In fact, GENM (MP; TP: RM4.32) reported a good set of results for all geographical areas while GENP (UP; TP: RM9.80) also posted improved results despite weaker Indonesian operations due to falling of production by 34% on droughts issue.

Same reason for YoY comparison, which saw 2Q16 core net profit plunging 52% from RM767.5m in 2Q15. Besides GENS which EBITDA fell from RM815.1m to RM370.0m, the plantation unit was also another earnings dampener, which saw the segment’s adjusted EBITDA dropping 17% to RM67.9m from RM82.2m as overall FFB volume contracted 19% despite CPO prices recovering 19% over the period. The oil & gas segment also reported lower EBITDA of RM41.2m from RM53.4m owing to the plunge in crude oil prices. Similarly, the YTD 1H16 core profit declined 23% to RM915.2m from RM1.19b which was mainly attributable to the sharp decline in GENS’ earnings with adjusted EBITDA plunging 33% to RM960.6m from RM1.43b.

Challenges in near term, especially for GENS which witnessed continued decline in VIP business volume. However, we remain positive on RWG due to its stable earnings while the development under GITP should likely turn the hilltop resort into a main holiday attraction in the region. Meanwhile, the North American operations should improve further as new Resort World Bimini has shown improvement in the recent quarters while the UK operations could be volatile due to its VIP-centric business profile while the Resort World Birmingham may need some time before showing meaningful results.

Upgrade to OUTPERFORM. We slashed FY16/FY17 estimates by 6%/5% as we lowered GENS’ earnings as well as our FFB growth assumption for GENP from +2%/+15% to -5%/+11%. Meanwhile, price target is now RM9.32/share from RM9.23/share based on unchanged 20% discount to its SoP valuation after adjusting for new target for GENP and the market price for GENS. Despite the earnings cut, we see value in GENTING following the share price correction of 16% since our last downgrade in early April. Thus, we upgrade the stock to OUTPERFORM. Risks to our upgraded call are a decline in casino business volume coupled with poorer luck factor and decline in CPO prices.

Source: Kenanga Research - 26 Aug 2016