The 2-week impact of the lockdown severely impacted its 1QFY20 which turned to losses while on-going business disruption will see a worse 2QFY20 with an estimated operating loss of RM200m in April alone. As such, stock price will remain volatile given the earnings uncertainty. We cut the stock to MP from OP with unchanged TP of RM2.50, given the 24% share price appreciation in the past two months.

1QFY20 below expectations, as GENM turned into the red with core loss of RM47.8m against house/street’s full-year FY20 net profit estimate of RM676.6m/RM415.8m. This was due largely to the greaterthan-expected impact of operation closure due the world-wide lockdown. The 1QFY20 core earnings were adjusted for a total of RM346.3m impairment loss for the impact of COVID-19 on the business activities; (i) RM223.3m for assets of Resorts World Birmingham, (ii) RM56.5m for casino licences and assets in UK, and (iii) RM66.5m for assets of Resorts World Bimini. Meanwhile, there was no dividend declared during the quarter as it usually pays half-yearly dividends.

Results turned into the red… 1QFY20 results were badly impacted by the business closure that caused a core loss of RM47.8m from core profit of RM216.2m in 4QFY19. The total adjusted EBITDA for Leisure & Hospitality businesses across all geographical locations declined 32% or RM171.5m. The results were further impacted by higher share of loss from Empire at associate level to RM100.1m from RM31.6m which was largely due to refinancing costs amounting to RM48m. However, the share of Empire’s operating loss was at only RM13.5m.

… largely due to the lockdown. YoY, results were impacted by the business closure which caused a core loss of RM47.8m in 1QFY20 against a core profit of RM377.3m posted in 1QFY19. Besides this, 1QFY19 also saw extremely strong RWG earnings of adjusted EBITDA of RM555.6m on exceptionally high hold percentage vs. RM331.2m in 1QFY20. The North America operation also saw higher payroll costs and opex from RWNYC that dragged down earnings further.

Expecting the worst in 2QFY20. With only two weeks of closure in March, the impact on 1QFY20 was already very material. And, it is now already two months into 2QFY20 and its doors remain shut. As such, 2QFY20 is highly likely to be worse than 1QFY20. Management disclosed that the burn rate in April for RWG was RM4m/day, GBP7m/month for UK and USD7m/month for North American operations. As such, operating loss is estimated to be c.RM200m for April alone.

Cost control in place; opening of outdoor theme park delayed.

Management is looking to implement various aggressive cost control measures, including reduction in opex such as payroll. Meanwhile, the opening of its outdoor theme park is delayed yet again, to end-2021 from 3QFY20. Post-1QFY20 results, we cut FY20E/FY21E CNP further by another 39%/12% factoring in a greater impact from the lockdown. However, we keep our NDPS of 12.0 sen unchanged for now.

Cut to MARKET PERFORM from OUTPERFORM, as share price has recovered 24% in the past two months since our upgraded call in endMarch. We still expect near-term price volatility amid the on-going pandemic. We stay with our PBV-based target price of RM2.50 which is based on -2SD 5-year mean of 0.79x. Upside risk to our downgraded call is lower than expected impact on business volume from the business disruption.

Source: Kenanga Research - 22 May 2020