FY16 earnings are within expectations with a generous special dividend to reward shareholders. Besides, earnings from all geographical gaming units are encouraging. Having said, the recent strong share price rally, at +19% YTD, should have priced in its near-term positives. Thus, we downgrade the stock to MARKET PERFORM with an unchanged target of RM5.66/SoP share.

4Q16 in line. At 95% of our estimates, FY16 core earnings of RM1.59b came broadly within our expectation but beat market consensus by 8%. It recognised a one-off gain of RM1.27b from the disposal of its investment in Genting HK in 4Q16 which was treated as exceptional item. Meanwhile, it has declared total NDPS of 13.5 sen in 4Q16, which included 7.3 sen special NDPS (ex-date: 08 Mar; payment date: 28 Mar) and 6.2 sen final NDPS (to be determined later). This brought FY16 NDPS to 16.5 sen or 9.2 sen on a regular basis, vs. our assumption of 7.0 sen and 7.1 sen paid in FY15.

A good quarter operationally. Although revenue rose 4%, 4Q16 core profit fell 24% QoQ to RM357.1m from RM467.7m in 3Q16 mainly due to lower taxation in the preceding quarter where the deferred tax charge was RM137.6m in 4Q16 vs. RM18.5m previously. Operational-wise, adjusted EBITDA grew 12% on the back of 3% increase in revenue. Malaysian operations posted higher adjusted EBITDA by 5% as revenue rose higher by 3% while earnings for North America leapt to RM92.2m from RM24.2m due primarily to higher revenue coupled with the reversal of expenses over-accrued previously. However, UK earnings declined 36% to RM26.9m due to higher payroll despite revenue rising 6%.

Solid gaming numbers from last year. Despite flattish top-line, 4Q16 earnings rose 4% from RM342.8m as there was broad-base improvement for all Leisure & Hospitality segments where Malaysian business was helped by higher win percentage from VIP segment, higher contribution new Resorts World Birmingham for UK unit while the North America unit benefited from the abovementioned reason. In FY16, core profit leapt 43% to RM1.59b from RM1.11b as revenue rose 6% from last year. This was mainly attributable to the turnaround in UK operation from a loss of RM124.2m at EBITDA level to a profit of RM260.4m owing to higher revenue coupled with lower bad debt written off. The North America unit also saw 71% jump in adjusted EBITDA for the same reason as mentioned above.

GITP is the key focus going forward. 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 the retail space, restaurants and casino floor since end-2016, which should be able to contribute to bottom-line. Despite a relatively good set of results so far, 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 next year.

Reduce to MARKET PERFORM. While keeping FY17 estimates, we introduce our new FY18 forecast with earnings expected to grow at 5%. Although we remain upbeat on the GITP program, the recent strong share price performance which rallied 19% YTD may have already priced in the positives. Thus, we downgrade the stock to MARKET PERFORM with unchanged price target of RM5.66/SoP share. Risk to our downgrade includes stronger-than-expected earnings especially from the GITP program.

Source: Kenanga Research - 24 Feb 2017