1Q19 results came below our expectation owing to our earlier high optimism on GENM, but it matched market consensus. Despite a challenging near-term outlook, GENTING is a key beneficiary of earnings recovery in GENS, GENM’s expansion story as well as new market in Japan. Remain OUTPERFORM with a revised target price of RM7.00 for its cheap PER of below 10x.

1Q19 below expectation. Although 1Q19 Core Profit of RM736.1m made up 26% of our FY19 estimates, the results are below our expectations given our earlier optimistic forecast on GENM (OP; TP: RM3.40) on the impact on 10% casino duties hike. However, the 1Q19 results matched market consensus, which accounted for 31% of fullyear consensus estimates as GENM’s 1Q19 results were distorted by exceptionally high hold percentage for mid–to-premium player segment. No dividend was declared during the quarter, as expected, as it usually only pays half-yearly dividends.

Results helped by GENM… 1Q19 core profit rose 14% QoQ to RM736.1m led mainly by casino operation in Malaysia due to the abovementioned luck factor while lower taxation and MI also contributed to the improvement in earnings. However, other business units reported lower earnings with GENS (Not Rated) facing lower business volume, GENP (UP; TP: RM9.00) hit by lower CPO and PK prices by 17% and 38%, respectively, Oil & Gas unit saw a lower selling price while its Power unit was hit by outages in Banten Power Plant in Indonesia.

…but Malaysia gaming tax hike crimped margin. 1Q19 earnings rose sequentially by 6% from RM695.0m which was largely attributed to higher Malaysia casino earnings due to exceptionally good luck factor as mentioned above as well as stronger earnings from GENP due to 7% recovery in CPO prices couple with solid Downstream unit. However, the higher earnings did not translate into better profit margin given the 10% hike in gaming tax back home. Lower business volume capped GENS’ results while both Power and Oil & Gas earnings were impacted by outages and lower selling price as mentioned above.

A mixed outlook, with the two key casino operators, GENS facing challenging outlook on geopolitics while the gaming tax hike hit RWG’s

profit margin. Meanwhile, the North American operation 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 VIPcentric business profile while Resort World Birmingham may need some time before showing meaningful results. Lastly, GENP could hit a soft patch in the next quarter due to depressed CPO prices and lower harvesting activities during Ramadan.

Keep OUTPERFORM. Post 1Q19 results, we cut FY19/FY20 estimates by 13%/11% mainly on earnings cut on GENM and GENP. Our target price is also cut to RM7.00 from RM7.95 after a higher discount of 41% from 38.5% (both 3-year mean) to SoP valuation, which is adjusted for target prices downgrade for GENM and GENP while GENS and LANDMRK (Not Rated) are based on market prices. Despite these downward adjustments, we still keep our OUTPERFORM call as it is the ultimate beneficiary for GENS’ earnings recovery, GENM’s expansion story and well as new Japan market expansion, if any. The target price implies CY20 PER of 9.7x.

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 - 24 May 2019