Although 1Q18 results were disappointing largely due to the VIP-centric UK operations, we remain upbeat on its Malaysia operations as the GITP expansion program is starting to be fruitful. The zero-rated GST will help to boost consumer spending, which bodes well for the casino operator. We continue to rate GENM an OUTPERFORM with a revised target price of RM5.75/SoP share.

1Q18 below estimates. At 21%/23% of house/street’s FY18 estimates, 1Q18 core earnings of RM372.2m missed expectations. The main discrepancies between our estimate and the actual earnings were: (i) weaker-than-expected UK earnings, and (ii) interest expense being underestimated. No dividend was declared in 1Q18 as it usually pays half-yearly dividends.

Sequential results impacted by UK operations. 1Q18 core profit fell 17% QoQ to RM372.2m from RM447.8m on the back of 6% decline in top-line. This was attributed by lower UK operations on lower volume coupled with poorer luck factor for London casinos, which sent the UK & Egypt unit’s adjusted EBITDA lower by 52% to RM30.6m while the Malaysia operation also saw lower adjusted EBITDA by 11% to RM533.7m on lower hold percentage despite higher business volume. Meanwhile, the North America unit reported adjusted EBITDA jumping 70% to RM64.8m, largely due to higher revenue from RWNYC.

Home turf operation led the YoY earnings. However, 1Q18 earnings rose 7% YoY from RM347.7m in 1Q17 as revenue grew 8%. This was primarily attributed to the Malaysia operations on overall higher business volume from mass to premium segments, which sent the unit’s adjusted EBITDA higher by 22%. The North America operations also posted higher earnings by 57% on improved earnings from RWNYC while the Bimini operations reported lower operational loss on its cost rationalisation initiatives. Meanwhile, the UK & Egypt unit reported lower adjusted EBITDA by 61% due to the abovementioned sluggish results from the London casinos.

GITP is the key focus going forward. While the main attraction 20th Century Fox World Theme Park’s opening is delayed to this year-end, the RM10.38b 10-year GITP development has been progressively opening retail spaces, 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 by year end.

Maintain OUTPERFORM. In view of this weak set of results, we cut FY18-19 earnings estimates by 10%-4% to account for lower UK earnings on luck factor and higher interest expense assumptions. Post- earnings revision and a change in valuation base year to CY19, we trimmed target price slightly to RM5.75/SoP share from RM5.80/SoP share. It remains OUTPERFORM 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 - 25 May 2018