2Q19 core profit of RM359.7m, which met expectations, was driven by extreme favourable hold percentage that was the same as 1Q19. Besides, it also saw improving non-gaming revenue at the hilltop resorts which is likely to show even better results in the future with the long-awaited outdoor theme park opening in 3Q20. Meanwhile, the RPT transaction involving Empire will continue to cap market sentiment, but we believe near-term negatives should have been price in. MP and TP at RM3.20 maintained.

1H19 matched expectation. At 53%/59% of house/street’s FY19 estimates, 1H19 core profit of RM737.0m came within our estimate as 2Q19 was extremely strong on “luck factor”, but the results beat market expectation. It declared 1st interim NDPS of 6.0 sen (ex-date: 18 Sep; payment date: 11 Oct) in 2Q19 which is the same as 2Q18.

2Q19 results remained solid. Despite core profit falling 5% QoQ to RM359.7m while revenue also decreased 5%, 2Q19 results were considerably strong, with 1Q19 luck factor extremely high, as hold percentage remaining high. Although domestic revenue dipped 8%, which was largely due to lower business volume, earnings only fell 3% on the abovementioned luck factor. North America unit posted 55% jump in adjusted EBITDA on normalisation as 1Q19 incurred expenses of RM27.1m for RWNYC. UK and Egypt segment posted 10% growth or RM4.1m rise in earnings. Overall, the decline in core profit was driven by higher taxation of RM43.6m or 148%.

Operation numbers were sound. Earnings at adjusted EBITDA level showed improvement YoY for both 2Q19 and 1H19 due to: (i) Malaysia casino experienced better luck for mid-to-premium segment as well as higher contributions from non-gaming business reaping fruits from GITP expansion program, (ii) higher North America earnings on lower operating losses for Resort World Bimini, and (iii) higher UK earnings due to impact of adopting MFRS 16. However, core profit fell 20% to RM359.7m in 2Q19 and 10% to RM737.0m in 1H19 which was primarily due to higher interest expense of 53% and 73%, respectively, on lower qualifying assets eligible for interest capitalisation as certain projects were completed under GITP.

Outdoor theme park to start in 3Q20 to drive non-gaming segment. After resolving the dispute with Fox, management is targeting to launch the brand-new outdoor theme park at Genting Highland in 3Q20, which should help to boost earnings in its nongaming segment. However, the RPT transaction involving Empire, which is targeted to conclude by year-end has created another earnings risk as well as raised corporate governance issue. Based on FY18 data, the acquisition could impact GENM’s earnings negatively by 17% should it remains loss-making in the future.

RPT headwind to remain; MP rating maintained. GENM came under heavy selling pressure since the announcement of the RPT which we believe should have priced in all near-term negatives. Thus, we keep our MARKET PERFORM rating at unchanged price target of RM3.20, which is based on 20% discount to its SoP valuation.

Risks to our call include extreme good “luck factor” and business.

Source: Kenanga Research - 30 Aug 2019