Index-stock GENTING has been bombed out in this COVID- 19 pandemic-led market melt-down, tanking 41% YTD nearing -3SD PBV to its 5-year mean. We opine that a hit on earnings is expected to be severe as casinos are temporarily closed but the aggressive sell-down has overshot beyond fundamentals as the pandemic will subside eventually. Meanwhile, its financial strength will keep it braving through this troubled times. Keeping OP for its deep values with a lower TP of RM4.90. Ideal entry price is placed at RM3.20.

Share hit by COVID-19. YTD, share price of GENTING has plunged 41% to near 3SD below its 5-year PBV mean as the COVID-19 spread to become a pandemic globally that is restricting business activities. So far, the group’s Leisure and Hospitality operations are mostly temporarily closed except GENS’ Resorts World Sentosa and GENM’s Crockfords Cairo in Egypt. Having said that, we believe the sell-down to -3SD level is overly pessimistic and also too excessive. At one point, it closed at RM1.92 last week, -51% YTD or at 11-year low since the 2009 financial crisis.

Cut FY20 estimate by another 13%. Following our previous 27% cut in FY20E earnings in end-Feb to adjust for GENM and GENS’s earnings on the COVID-19 outbreak, we cut FY20 earnings estimate further by 13% on the back of the 4-week Movement Control Order (MCO) in Malaysia and the closure of other non-Malaysia GENM casinos in UK, USA and Bahamas coupled with revised GENP’s estimates on lower CPO price by 6% to RM2,550/MT. We also reduced FY21 earnings forecast by 7% for the adjustment in GENM earnings as well as a lower CPO price-driven GENP forecast. For now, we keep our GENS projections unchanged as we have already cut forecast at end-Feb and Resort World Sentosa is still open during this period.

Value the stock at -2SD from 5-year PBV mean. Given the challenging business condition, earnings estimate is dicey at this juncture. Therefore, we decided to switch to PBV valuation method from SoP valuation. At current environment, we place -2SD as the fair value level for casino operators while the ideal entry price should be at -3SD. This is one notch lower than the NFO players as casino players face higher earning risk than NFO peers, as demonstrated by the current sell-down. In SoP prospective, GENTING is now trading at 63.2% discount to its SoP valuation which is comparable to -4SD 5- year mean of 63.4%

Keep OUTPERFORM for deep valuation. We cut our target price to RM4.90, which is based on 0.5x PBV or -2SD PBV 5-year mean, from SoP-driven target price of RM6.65. We believe the new target price is fairly conservative which implied a 10% premium to its combined equity stake values in GENS and GENM based on current prices, not forgetting its equity stakes in GENP and other non-core businesses. As such, it is offering deep value at this price. Thus, we maintain our OUTPERFORM rating. Ideal entry price is RM3.20 which is -3SD PBV 5-year mean of 0.34x. Risk to our call is a prolonged COVID-19 pandemic which will continue to restrict travelling and affects its casino operations.

Source: Kenanga Research - 27 Mar 2020