3Q17 results which were at its weakest in two years is a big let-down being hit hard by the luck factor at RWG. This led us to cut our FY17 earnings estimate by 20%. However, its share price appears attractive following recent sell-down by 20% since May, while the upcoming 4Q17-1Q18 are expected to be stronger on seasonality. We upgrade GENM to OUTPERFORM with revised price target of RM5.80/SoP share.

3Q17 below again. At 55%/60% of house/street’s FY17 estimates, 9M17 core profit of RM850.6m came below expectations again due to poor luck factor at its Malaysia operations in 3Q17 despite higher business volume. To recap, the disappointing 2Q17 results were due to higher start-up costs at GITP. There was no dividend declared in 3Q17 as expected.

Lower sequential results on luck factor. 3Q17 core earnings slumped 14% to RM232.2m, the weakest quarterly earnings in two years, while revenue dipped slightly by 1%. This was largely attributable to the lower hold percentage at RWG despite higher business volume, which led to EBITDA declining by 23%. The Northern America operations also saw lower earnings by 36% due to lower revenue. However, the UK casinos posted higher earnings by 50% on luck factor and higher business volume.

Also hit by GITP’s start-up costs. Despite both 3Q17 and 9M17 reporting higher revenue by 3% and 2%, respectively, core earnings plunged 50% and 31% to RM232.2m and RM850.6m. This was due to pre-operating expenses for GITP besides the poorer luck factor in 3Q17 mentioned above. On the other hand, UK and North America operations posted higher earnings YoY by 28% and 147% in 3Q17 on higher revenue and lower opex, respectively. YTD, 9M17 earnings for North America unit surged 95% due to higher revenue at RWNYC and lower opex for Resort World Bimini. However, UK earnings contracted 28% due to lower revenue coupled with higher bad debts.

GITP is the key focus going forward. While the main attraction, 20th Century Fox World Theme Park’s opening is delayed to 2H18, the RM10.38b 10-year GITP development has been progressively opening the retail space, restaurants and casino floor since end-2016, which should contribute to bottom-line. Going forth, 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.

Upgrade to OUTPERFORM. With this weaker set of results, we cut FY17-FY18 estimates by 20% and 5% as we solely adjust RWG’s luck factor lower; thus, lowering our price target to RM5.80/SoP share from RM6.00/SoP share previously. Nonetheless, GENM appears attractive following recent price weakness having retracing 20% from its peak in end-May. As such, we upgrade the stock to OUTPERFORM from MARKET PERFORM on the premise of earnings growth story from GITP expansion. Risks to our call include poorer luck factor and weaker casino earnings.

Source: Kenanga Research - 24 Nov 2017