2Q19 performance was satisfactory with overall good casino results where "luck factor" was still good but plantation earnings were hit by lower CPO. Despite the current headwind, especially the RPT deal in GENM, GENTING is still a key beneficiary of earnings recovery in GENS, GITP expansion story and new market in Japan. Trading close to a new low since 2010 and discount to SoP at -1SD 3-year mean, it is deep in value. Keep OP at a revised TP of RM6.75.

2Q19 results within expectations. Despite core profit falling 26% QoQ to RM543.5m, 2Q19 results were on track to meet our forecast with 1H19 core profit of RM1.28b making up 51% of our FY19 estimates but beat market expectations as it made up 55% of consensus estimates. A first interim NDPS of 6.5 sen was declared in 1H19 which is lower than 8.5 sen paid in 1H18.

Lower earnings sequentially. 2Q19 core profit contracted 26% QoQ to RM543.5m, on the back of 2% dip in revenue, owing to: (i) weaker casino earnings by 4%, and (ii) higher depreciation and taxation. GENM’s Malaysia operation saw lower earnings due to higher taxation, but "luck factor" remained strong. Meanwhile, GENS faced higher provision and depreciation while gaming revenue rose on higher volume and improved “luck factor”. However, GENP reported lower earnings with plantation earnings being thumped 40% as FFB output fell 7% coupled with 2% decline in CPO prices. However, earnings for power segment surged 80% or RM60.1m as 1Q19 earnings were affected by outages at Banten Power Plant while Oil & Gas earnings fell 12%.

Casino operations led yearly results. YoY, 2Q19 core profit declined 20% from RM683.4m although revenue leapt 13%. This was due to: (i) a 24% jump in depreciation as GENS had written down or recognised assets that can be demolished or rebuilt after the government approved its Expansion 2.0, and (ii) a 24% decline in plantation adjusted EBITDA as CPO prices contracted 16%. Overall, casino earnings rose 10% on improved results for all geographical segments except Malaysia on overall business volume, but "luck factor" remained high. Power earnings jumped 18% on higher generation from Banten Power Plant while oil & gas unit recorded lower earnings by 15% on lower oil prices. YTD, FY19 core profit fell 4% to RM1.28b despite revenue rising 9%, on the back of similar reason as the YoY changes for 2Q19.

A mixed outlook, as GENS is cautious on the VIP business while GENM should see increasing contribution from non-gaming segment as the outdoor theme park is targeted to open in 3Q20. 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. Weak CPO outlook does not augur well for GENP.

Deep value; keep OUTPERFORM. Post-2Q19 results, we trimmed FY19/FY20 estimates by 0.6% each, solely adjusted for GENP’s earnings downgrade. Our target price is reduced to RM6.75 from RM7.65 on changes in target prices of GENM and GENP and market prices for GENS and LANDMRK, with higher holding company discount of 42.4% from 38.5% to its SoP valuation. The stock is close to a new low since 2010, trading at 49.5% discount to its SoP which is closer to -1SD 3-year mean of 50.5% which we believe is fairly attractive. As such, we maintain our OUTPERFORM rating.

Risks to our call are: (i) decline in casino business volume (ii) coupled with poorer “luck factor” as well as (iii) decline in CPO prices.

Source: Kenanga Research - 30 Aug 2019