9MFY19 results beat expectations on stronger-than- expected Malaysia earnings owing to better luck factor coupled with stronger non-gaming contributions. The opening of the outdoor theme park in 3QFY20 will drive non-gaming earnings higher. Although the RPT transaction involving Empire will continue to cap market sentiment, we believe near-term negatives should have been priced in. Maintain MP with upgraded TP of RM3.30.

9MFY19 beat expectations. At 79%/82% of house/street’s FY19 estimates, 9MFY19 core profit of RM1.09b came in above expectations given the stronger-than-expected earnings from its domestic operations where it posted strong luck factor in 2QFY19 while the non-gaming business continued to grow stronger. No dividend was declared during the quarter as expected as it usually pays half-yearly dividend.

Flattish sequential results. 3QFY19 core profit fell slightly by 2% QoQ to RM352.1m from RM359.7m previously despite revenue inching up 1% to RM2.63b. The fall in earnings was primarily driven by lower earnings by 46% or RM47.2m at adjusted EBITDA level from North America operation due to lower overall revenue and higher payroll costs for RWNYC. While RWG’s earnings were flattish albeit higher revenue by 2% which was due to improved hold percentage, adjusted EBITDA for UK & Egypt operation jumped 90% or RM40.6m due to lower bad debts.

Casino tax hike hit yearly results. On YoY comparison, 3QFY19 core profit fell 39% from RM579.1m, although revenue rose slightly by 1%, mainly due to lower Malaysia earnings by 16% at adjusted EBITDA level largely affected by a 10% hike in casino tax. In fact, Malaysia revenue rose 5% due to improved hold percentage for mid-to-premium segment, but business volume declined owing to reduction in incentives offered to players, while non-gaming revenue jumped by 36%. Elsewhere, the North America operation also saw lower earnings which were due to higher payroll as mentioned above while UK & Egypt’s earnings improved on lower bad debts. 9MFY19 core profit declined 22% to RM1.09b for the similar reason of casino tax hike.

Non-gaming earnings continue to grow with the coming outdoor theme park opening in 3QFY20. The group has started to reap fruit from the GITP expansion plan. Going forth, focus will be on turning around the loss-making Empire by synergising RWNYC with Resorts World Catskills as this high-profile RPT transaction has raised corporate governance issue. Any turnaround effort will act as price catalyst as the stock was heavily sold-down since the announcement of the RPT.

RPT concerns to remain; MP maintained. Post-results, we raised FY19/FY20 estimates by 7%/6% solely on adjustment for higher earnings assumption for Malaysia operation for both gaming and non- gaming businesses. This also increased our target price slightly to RM3.30 from RM3.20 based on unchanged 20% discount to its SoP valuation. In all, we believe all near-term negatives, including the RPT Empire transaction, should have priced in. Thus, we keep our MARKET PERFORM rating. An upside risk to our call is extremely good “luck factor”.

Source: Kenanga Research - 29 Nov 2019