GENM is finally selling off its entire 16.9% stake in Genting HK after holding it for nearly two decades. We are positive on the disposal as the proceeds can use for meaningful projects, such as GITP, as the non-core stake investment in Genting HK had hardly seen any returns. The RM1.71b disposal proceeds could be used to partly fund the GITP to help in interest savings. We maintain our MARKET PERFORM call with revised price target of RM4.78/SoP share.

Disposal of GENHK finally. Last Friday, GENM announced that the group had entered into a share sale agreement to dispose the entire 16.87% stake in Genting Hong Kong Ltd (GENHK) for USD415.0m (c.RM1.71b) or USD0.29/share. The buyer is GENHK’s majority shareholder with 47.22% stake, Golden Hope Ltd, which is controlled by the Lim family. The selling price is an 8.2% premium to the 5-day VWAMP of USD0.268 while the disposal is expected to be completed on 21 Oct.

A positive move. Although this is a RPT, it is a positive move as the non-core stake in GENHK has not much impact on GENM while the disposal proceeds can be better applied for its expansion program, such as the RM10.38b GITP development. In fact, GENHK used to be a wildcard and impacted GENM badly in which the latter owned more than 20% stake, which qualified for equity accounting. However, since GENM reduced its stake to below 20% in 2007, the impact from GENHK became immaterial.

Immaterial earnings impact. While the announcement did not disclose the disposal gain/loss of this divestment, we believe the impact is small given that the Genting group always reported mark-to-market value on their investments in listed companies on a quarterly basis. However, we made adjustments to our earnings model to reflect this disposal as the proceeds will affect interest income while we have also made upward adjustment on Genting UK and the North America earnings following their strong numbers in 1H16. In all, we upgraded FY16E/FY17E earnings by 8%/6%.

Still MARKET PERFORM. We have decided to upgrade CY17 EV/EBITDA valuation for the local operations to 9.2x, at a 10% premium to its 10-year average of 8.4x as the early phase of GITP which started opening their doors in 2H16 is an earnings and price catalyst. Meanwhile, we also increased Genting UK and the North American operations’ CY17 EV/EBITDA to 7.4x from 6.7x which is at a 20% discount to its Malaysian operations’ valuation of 9.2x from 8.4x, respectively, following their improved earnings. We have also removed valuation on GENHK from our valuation. Thus, our new price target is raised to RM4.78/SoP share from RM4.32/SoP share previously. We keep our MARKET PERFORM call unchanged while downside risks to our call are depressed earnings on lower business volume and hold percentages.

Source: Kenanga Research - 4 Oct 2016