While 3Q18 headline net loss was hit by impairment at GENM, core earnings stayed on track. All business segments reported improved earnings, especially casino business, except plantation, which was hit by lower CPO prices. We opine that while the current issues with GENM will continue to suppress GENTING’s share price, one cannot deny the attractive valuation of the stock. OUTPERFORM maintained at RM7.55.

3Q18 within expectations. GENTING reported headline 3Q18 net loss of RM275.8m largely due to RM1.83b impairment posted in GENM (MP; TP: RM3.10) for its investment in a US Tribe casino development which turned unfeasible. Ex-EI, 3Q18 core profit of RM705.0m brought YTD 9M18 core profit to RM2.03b which matched our forecast as it accounted for 76% of our FY18 estimates but beat consensus estimates at 82%. No dividend was declared in 3Q18, as it normally pays half-yearly dividend.

A broad-base improvement. 3Q18 core profit rose 3% QoQ to RM705.0m despite a strong top-line growth of 12%, due to higher taxation by RM169.0m or 57% as GENM changed the basis of tax incentive utilisation. In fact, 3Q18 was an operationally strong quarter as all business segments reported improved results except plantation segment. GENS (Not Rated) rebounded in 3Q18 on better luck factor and business while GENM posted stronger business volume and luck factor at home as well as in UK & Egypt operations. However, GENP’s (OP; TP: RM10.50) 3Q18 earnings hit by lower CPO prices.

The yearly results led by Malaysian casino operation. 3Q18 core profit jumped 36% from RM518.2m while revenue rose 7% over the year. This was mainly driven by casino operations, especially the home turf operations on higher business volume coupled with luck factor. Both Oil & Gas and Power segments posted 37%/36% earnings growth on higher oil prices and generation from Banten coal-fired plant in Indonesia and Jangi wind farm in India, respectively. However, plantation hit by lower CPO prices yet again. YTD, 9M18 core profit jumped 38% to RM2.03b on the back of 5% hike in revenue for the abovementioned reasons.

A better outlook, as we believe casino volume at GENS has somewhat bottomed out following the recovery in the past year. Meanwhile, we are positive on RWG due to its stable earnings. Meanwhile, the North American operations should improve further as the new Resort World Bimini has shown improvement in 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. GENP should also expect strong FFB production growth from its new acquisition in Indonesia and increasing mature area.

Maintain OUTPERFORM. Post-3Q18 results, we made no changes to our forecasts. Meanwhile, our SoP valuation is reduced to RM12.24 from RM15.52 following the new target prices for GENM and GENP with updates for the latest market prices for GENS and LANDMRK (Not Rated). With unchanged discount of 38.5% (3-year mean) to SoP valuation, GENTING’s new target price is reduced to RM7.55 from RM8.20 previously. Share price has fallen 13% in the past month, largely due to the sharp decline in GENM on higher casino duties and the cancellation of Fox Theme Park; and now it is hit by the RM1.83b impairment. We believe it is deep in the money while there are other values in non-GENM assets, especially GENS. OUTPERFORM maintained. Risks to our call include: (i) decline in casino business volume coupled with poorer luck factor, and (ii) decline in CPO prices.

Source: Kenanga Research - 03 Dec 2018