We are upgrading GENM to OUTPERFORM as the GITP expansion program will escalate the sole casino operator’s earnings to a new high and transform the hill-top resort to a world-class family holiday destination. With much anticipation, it is now time for GENM to show results as early phase of the projects have started. And, we believe the group should be able to bear fruitful results given what they are offering in the store. We also revised our price target for GENM to RM5.66/SoP share.

A day at the hilltop. Last week, we went for a walk-about at Genting Highlands following the new openings of Awana SkyWay and SkyAvenue recently. The tour reinforced our positive view on the RM10.4b Genting Integrated Tourism Plan (GITP) expansion program which we believe is a game changer to make the hill-top resort a destination for exciting family holidays and leisure pursuits from merely being perceived as just a casino operation with tired-looked hotels and outdated theme park facilities. This is especially so when the 20th Century Fox Theme Park is ready to open latest by this year-end if not early next year.

“New way” of going up the hill. The GITP could make changes to the way of commuting to the highlands. Ample parking bays at the new Awana SkyWay building allow visitors to park their cars at the mid-hill for shopping at Genting Highlands Premium Outlet (GHPC), or to take a 10- minute cable car to the new SkyAvenue Building for shopping and dining and the new 20th Century Fox Theme Park and other existing facilities are just at the doorstep. More importantly, the highland offers something other competitors in the region are unable to offer, the cool highland climate. With all these offerings, Genting Highlands will become one of the world-class holiday destinations.

Earnings to be felt by 2H17. We see three key points from the GITP. Firstly, as there will be only a 100-suite premium hotel in SkyAvenue and the two new brand new hotels by three years’ time, day-trippers are expected to take up the new capacity. Secondly, the new theme park should attract more local Muslims to frequent the hilltop resorts from previously being a casino-centric holiday destination. Lastly, the new gaming capacity will be a long-term earnings growth driver and make GITP a successful project. Nonetheless, we expect earnings start to contribute from 2H17 onwards and more meaningful impact is likely to be felt in 2018 as most of the key projects will only kick start later.

Upgrade to OUTPERFORM. While keeping estimates for now, we decided to upgrade CY17 EV/EBITDA valuation for the local operations to 11.2x, at a 10% premium to its 3-year average of 10.2x, from 9.2x previously as it is expected to re-rate further as GITP started opening their doors recently. Thus, our new price target is raised to RM5.66/SoP share from RM4.80/SoP share previously. As such, we are upgrading the stock to OUTPERFORM from MARKET PERFORM. Downside risks to our upgrading call are depressed earnings on lower business volume and hold percentages as well as delay in the key GITP projects such as theme park and new casino capacity.

Source: Kenanga Research - 26 Jan 2017