3QFY19 results were satisfactory with GENS’ results affected by unfavourable luck factor but GENM was helped by better luck factor coupled with stronger non-gaming business. GENP also saw weaker earnings on lower PK price. Going forth, we believe GENTING is still a key beneficiary of earnings recovery in GENS, GITP expansion story and new market in Japan. Keep the stock as OUTPERFORM for its deep valuation at revised target price of RM7.00.

3QFY19 results on track. At 75% of our FY19 estimates, 9MFY19 core profit of RM1.89b met our expectation but beat market consensus at 82% of consensus estimate. No dividend was declared in 3QFY19 as expected as it usually pay half-yearly dividend.

Sequential results were skewed by lower MI. While revenue fell 3%, 9MFY19 core profit jumped 12% to RM609.9m which was largely due to lower MI by 10% or RM45.4m. In fact, at adjusted EBITDA level, earnings were fairly flattish at RM1.99b. While the decline in GENS’ earnings was due to poorer luck factor, GENMs earnings for Malaysia operation were helped by better luck factor. GENP saw its plantation earnings fell 15% on lower PK prices. Power earnings were flattish at RM135.0m while Oil & Gas earnings rose 24% or RM11.4m.

Lower casino earnings led yearly results lower. YoY, 3QFY19 core profit fell 13% from RM705.0m in 3QFY18 with revenue dipping 2%, driven by lower casino earnings where GENS and UK were hit by poor luck factor while GENM’s earnings were negatively impacted by a casino tax hike. GENP’s earnings declined on lower PK prices while Power earnings were negatively affected by lower net generations. YoY, 9MFY19 core profit fell 7% to RM1.90b on similar reasons mentioned above.

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 3QCY20. Meanwhile, the North American operation should improve further as the new Resort World Bimini has shown improvement in recent quarters while the UK operation could be volatile due to its VIP-centric business profile. However, improving CPO outlook should augur well for GENP.

Keep OUTPERFORM for deep valuation. Post-2QFY19 results, we raised FY19/FY20 estimates by 3%/2% mainly on adjustment for GENM and GENP. This lead to slightly higher target price of RM7.00 from RM6.75 based on unchanged 42.4% holding company discount to its SoP valuation on changes in target prices of GENM and GENP and market prices for GENS and LANDMRK. The stock is trading at 49.5% discount to its SoP valuation 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) poorer “luck factor”, and (iii) decline in CPO prices.

Source: Kenanga Research - 29 Nov 2019