4QFY19 results are below expectations due to lower hold percentage coupled with maiden share of associate losses for Empire. Going forth, the upcoming 1QFY20 are expected to be weaker on Covid-19 effect on travel. However, we believe all negatives should have been reflected in the share price. Thus, we keep our MP rating unchanged but revised TP lower to RM2.95.

4QFY19 below expectations. At 88%/93% of house/street’s estimates, FY19 core profit of RM1.31b came in below expectations due to: (i) weaker adjusted EBITDA from RWG on lower hold percentage in the mid-to-premium segment, and (ii) maiden share of associate losses of RM31.6m from Empire. It declared a special NDPS of 9.0 sen (ex-date: 13 Mar; payment date: 07 Apr) and proposed a final NDPS of 5.0 sen, all in 4QFY19, bringing FY19 NDPS to 20.0 sen vs. 19.0 sen inclusive of 8.0 sen special NDPS paid in FY18 and our FY19 assumption of 12.0 sen.

Hold percentage hit sequential results. 4QFY19 core profit plummeted 39% QoQ to RM216.2m from RM352.1m in the preceding quarter as revenue fell 7% to RM2.44b. The fall in earnings was primarily due to lower hold percentage in the mid-to-premium segment at RWG while GENM posted its maiden Empire contribution with a share of loss of RM31.6m at associate level. Meanwhile, adjusted EBITDA for UK & Egypt operation fell 30% to RM59.8m which was mitigated by higher earnings by 18% to RM65.3m at North America operation.

Casino tax hike hit yearly results. On YoY comparison, 4QFY19 core profit contracted 55% from RM479.7m while revenue fell 3%, led by Malaysia operation which was hit by lower hold percentages coupled with a 10% hike in casino tax and the abovementioned Empire’s losses. Other non-Malaysia assets also experienced weaker earnings as North America fell 4% on higher operating cost while UK & Egypt posted 29% contraction at adjusted EBITDA level on luck factor. YTD, FY19 core profit declined 31% to RM1.31b from RM1.88b in FY18 which was also due to similar reasons mentioned above.

Tough quarters ahead. The on-going deadly Covid-19 outbreak is disrupting business activities in the region which is affecting the regional casino operators badly and GENM is not spared. As such, visitation at the uphill resort is expected to come off. 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 a corporate governance issue. Any successful turnaround effort will act as price catalyst as the stock was heavily solddown since the announcement of the RPT.

Virus scare is the new concern; MP maintained. Post-results, we cut FY20 earnings estimates by 29% as we expect 1HFY20 results to slow down on the Covid-19 outbreak. Meanwhile, we introduce FY21 estimates where earnings are set to grow by 19%. Our target price is also lowered to RM2.95 from RM3.30 based on unchanged 20% discount to its SoP valuation. In all, we believe near-term negatives, including the RPT Empire transaction, should have been priced in. Thus, we keep our MARKET PERFORM rating. An upside risk to our call is extremely good “luck factor”.

Source: Kenanga Research - 28 Feb 2020