Although 9M16 results came below our expectation, 3Q16 in fact was a good quarter which saw a broad-base earnings growth for all business segments. However, the strong recovery in GENS may not be sustainable as the 3Q16 earnings was boosted by superb luck factor which was at its best since 1Q12. Nonetheless, GENM and GENP are expected to see better earnings on the back of GITP and stable CPO prices respectively. We maintain OUTPERFORM on GENTING with revised price target of RM9.14/share.

9M16 below. At 70% of our FY16 estimates, 9M16 core earnings of RM1.36b fell short again of our expectation given the lower-thanexpected GENS’ (Not Rated) earnings while both GENM (MP; TP: RM4.80) and GENP (UP; TP: RM10.20) beat our estimates. However, the results beat market expectations at 80% of consensus forecast. There was no dividend declared in 3Q16 which was expected.

But a good set of 3Q16 results. 3Q16 core profit soared 21% QoQ to RM444.7m as revenue leapt 11% from 2Q16 due to a broad-base growth in all business segments. GENS’ adjusted EBITDA in MYR term jumped 93% on luck factor while GENM’s bottom-line was helped by tax incentives arising from GITP. GENP’s adjusted EBITDA was boosted by FFB volume recovery of 33% coupled with stable CPO prices. Adjusted EBITDA for Power unit jumped to RM96.3m from RM16.2m due to the construction costs for the Banten Plant.

The same for YoY comparison, as 3Q16 and 9M16 core earnings jumped 191% and 31% to RM444.7m and RM1.36b from RM152.6m and RM1.04b, respectively, largely due to the recovery of GENS’ earnings in 3Q16, strong turnaround in UK operations and solid rebound in plantation earnings from last year. CPO prices jumped 29% YoY in 3Q16 and 18% in 9M16 from last year. The power unit also was the other strong performer with adjusted EBITDA surging 5.3-fold and 3.6-fold in 3Q16 and 9M16, respectively.

Still challenging in the near-term, especially for GENS as although it reported a rebound in 3Q16 which was largely due to luck factor, as VIP business volume has continued to decline to new low. 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.

Maintain OUTPERFORM. We trimmed FY16/FY17 estimates by 5.1%/ 0.1% as we lowered GENS’ earnings due to our over-bullish forecasts earlier. The new earnings are also adjusted for earnings upgrades in GENM and GENP as well as to factor in lower construction cost for the Power unit. With new target prices for GENM and GENP, as well as updated market price for GENS, SoP valuation is increased to RM13.05 from RM11.65 as market value for GENS surged 33% after a price rally coupled with the weakening of MYR. As we remain cautious on GENS, we decided to increase the holding discount to GENTING’s SoP valuation to 30% from 20%. Thus, the new price target is now reduced to RM9.14/share from RM9.32/share. Risks to our call are a decline in casino business volume coupled with poorer luck factor and decline in CPO prices.

Source: Kenanga Research - 25 Nov 2016