Although 1Q17 earnings were marginally lower than the preceding quarter, which was still within expectation, upcoming quarters are expected to be stronger given the launch of non-VIP floor at SkyCasino in end-March and VIP floor in 3Q17. We retain MARKET PERFORM on the stock for its GIPT growth story with a higher price target of RM6.00/SoP share. 1Q17 matched expectations. 1Q17 results came within estimates with 1Q17 core profit of RM347.3m making up 20%/21% of house/street?s FY17 estimates. As the SkyCasino for non-VIP floor was opened in end-March and VIP floor to open in 3Q17, earnings are set to escalate in the coming quarters. No dividend was declared in 1Q17 as expected.

Marginal weaker sequential quarter. Despite a CNY-quarter, 1Q17 core profit fell 3% QoQ to RM347.3m which was in tandem with the 3% decline in revenue. This was largely due to lower business volume for mid-to-premium segment at Malaysia operations, which dragged its top-line and adjusted EBITDA lower by 11% and 16% respectively. The decline in earnings also partly attributed to the net reversal of expenses over accrued at the Northern America operations in 4Q16. These were mitigated by an earnings? surge of 189% from UK on higher business volume, better hold percentage as well as higher bad debt recovery in 1Q17.

Yearly results helped lower taxation. Although revenue was flattish, 1Q17 earnings grew 9% YoY from RM319.1m largely helped by lower taxation of RM68.6m which we believe it could be due to the tax incentive for the GITP development program. In fact, at adjusted EBITDA level, 1Q17 earnings slid 3% to RM564.8m from RM583.1m previously, which was attributed to lower earnings from Malaysia and UK operations. The Malaysia operations incurred higher cost relating to VIP business as well as costs incurred for new facilities under GITP while the UK operations reported lower business volume. Meanwhile, the Northern America segment posted higher earnings on higher revenue from RWNYC and lower operating loss at Resorts World Bimini, coupled with favourable USD against MYR.

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 has been 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.

Still MARKET PERFORM. While keeping FY17-FY18 estimates, we rolled over our valuation year to CY18 to derive a new target price of RM6.00/SoP share from RM5.66/SoP share previously. Although share price has rallied strongly by 35% YTD, we maintain our MARKET PERFORM call for its GITP growth story. Downside risk to our call includes weaker-than-expected earnings, especially from the GITP program.

Source: Kenanga Research - 30 May 2017