2Q17 results came below expectation, mainly due to disappointing GENM results, which offset the recovery of GENS as well as strong power earnings as the new Baten Power Plant started operation in end-March. With improving GENS numbers and the GITP growth story at home, GENTING earnings are set to improve further. In addition, 2018 would be an exciting year given the new Japan market opportunity. We continue to rate the stock OUTPERFORM with revised price target of RM10.95/share.

1H17 disappointing albeit improved 2Q17 results. At 42%/40% of house/street’s FY17 estimates, 1H17 core profit of RM889.7m missed expectations. This was mainly due to the disappointing set of GENM’s (MP; TP: RM6.00) results which offset strong GENS (Not Rated) as well as power earnings. To our pleasant surprise, it declared 1st interim NDPS of 8.5 sen in 2Q17 (ex-date: 11 Sep; payment date: 06 Oct), the first interim dividend in three years.

2Q17 led by strong GENS and power earnings. 2Q17 core profit grew 38% sequentially to RM515.8m with revenue rising 4% from 1Q17. Operationally, the improved results were driven by strong GENS earnings while power earnings doubled on the commencement of Baten Power Plant in end-March. However, this was offset by weaker results of GENM arising from higher pre-opening expenses on GITP as well as Genting UK, which was hit by lower business volume and poor luck factor. Meanwhile, GENP (MP; TP: RM11.00) results were fairly satisfactory. The core net profit was skewered by lower MI of 24% or RM92.8m.

Yearly results skewered by MI. The 2Q17 and 1H17 results were operationally stronger than last year, which was led by good earnings across all business segments as adjusted EBITDA surged 55% and 35%, respectively, whereby casino unit was led by recovery of GENS earnings, GENP helped by better CPO prices and FFB productions while the new Baten Power Plant contributed to higher power earnings. However, higher MI capped 2Q17 and 1H17 earnings levels.

Better outlook, as the business volume at GENS seems to have bottomed with improving numbers in the recent quarters. Meanwhile, we remain positive on RWG due to its stable earnings while the development under GITP should transform 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. However, we remain neutral on plantation’s outlook.

Retain OUTPERFORM. To reflect disappointing GENM results, which were mitigated by strong GENS and power earnings, we cut FY17 estimates by 8% and fine-tuned FY18 forecast by 1% on adjustment. However, we raised FY17-FY18 NDPS to 15.0 sen from 4.0 sen previously following latest higher earnings payout. Our new target price is reduced to RM10.95/share from RM11.30/share after maintaining the 30% discount to its SoP valuation. It remains OUTPERFORM as the key beneficiary of the recovery of GENS as well as the GITP expansion plan. Risks to our OUTPERFORM call include: (i) decline in casino business volume coupled with poorer luck factor, and (ii) decline in CPO prices.

Source: Kenanga Research - 25 Aug 2017