Although 1Q19 results came below our forecast, which was due to our high optimism previously, clarity on the impact of the gaming tax hike should boost sentiment as consensus was pessimistic. It currently trades at 2SD below its 5-year mean, which is fairly attractive. We upgrade the stock to OUTPERFORM with a revised target price of RM3.40.

1Q19 below our estimate but beat consensus. At 23%/31% of house/street’s FY19 estimates, 1Q19 core profit of RM377.3m came below our estimates but beat market consensus. This is because we were too optimistic on profit margin post gaming tax hike and believing that the market was overly pessimistic on the tax hike effect. Although the 1Q19 earnings made up 23% of our full-year forecast, the results were distorted by an extreme good luck factor. No dividend was declared in 1Q19 as expected; it usually pays half-yearly dividends.

Exceptionally good luck factor boosted earnings but… 1Q19 core profit inched up slightly by 1% YoY to RM377.3m despite a higher percentage jump in revenue of 14% over the year. This was primarily driven by exceptionally high hold percentage in mid-to-premium player segment in Malaysia's casino, which propelled revenue higher. However, the additional 10% gaming tax which took effect in 1Q19 weighed on bottom-line. On a normalised luck basis, revenue should have declined 3% with a 27% plunge at adjusted EBITDA level with margin deteriorating to 25% vs. 35% in 1Q18. Meanwhile, casino operations in UK and the North America all posted improved results.

…additional tax impacted bottom-line. Sequentially, 1Q19 core profit plunged 21% from RM479.7m in 4Q18 despite revenue rising 9% over the quarter. The hike in revenue was largely due to the abovementioned luck factor for domestic market, but the said gaming tax hike coupled with higher cost for VIP segment crimped profit margin. In addition, all other geographical casino operations also reported lower earnings as RWNYC posted recognition of expenses under-accrued in the previous period while UK and Egypt units registered lower earnings due to lower revenue and debt recovery.

A better picture of post-casino tax hike. Share price of GENM has been in a roller-coaster ride since last November following the 10% hike in casino duties, termination of Twentieth Fox Theme Park and the huge RM1.83m impairment for the US Tribe’s promissory notes. In fact, its share price has declined 10% in the past three months. This 1Q19 result is the first quarterly result to reflect the casino tax hike which we believe the overly pessimistic market view, in our opinion, will adjust accordingly. On the other hand, there is still no update on the outdoor theme park at Genting Highland as the legal case is still ongoing.

Upgrade to OUTPERFORM. Post-results, we cut FY19/FY20 earnings estimates by 18% each as we were previously too optimistic on the impact from the casino tax hike. Given the clarity of impact from the tax hike, we reduced our discount to 10% from 20% against its SoP valuation and rolled over our valuation base year to 2020 from 2019. Our new target price is reduced to RM3.40 from RM3.60 previously. However, we upgrade the stock to OUTPERFORM from MARKET PERFORM previously as the price retracement of 10% to -2SD of 5- year mean, which presents a good buying opportunity. Even at a target price of RM3.40, the stock is valued at 13.8x FY20 PER which is still below its -1.5SD 5-year mean of 14.3x. Risks to our upgrading include (i) poor luck factor and (ii) lacklustre business volume.

Source: Kenanga Research - 24 May 2019