1HFY20 core loss of RM841.0m came in lower than expected as the COVID-19 pandemic which triggered business shutdowns hit all its casino operations hard. However, with operations re-opened since mid-June, upcoming quarters should see improvement. Despite projecting losses for FY20, we are of the view that GENM remains attractive for its undemanding valuation as earnings should recover swiftly once cross-border restrictions are lifted. We continue to rate the stock OP with revised TP of RM2.75.

2QFY20 below expectations, as core loss widened to RM793.2m, bringing 1HFY20 core loss to RM841.0m against our net profit forecast of RM411.8m and consensus net loss estimate of RM226.9m. This was due to the greater-than-expected impact of business shutdowns across its Malaysian, the UK and the Northern American units. Meanwhile, there was no dividend declared during the quarter although it usually pays half-yearly dividends and we were not surprised given the circumstances.

Loses widened… With revenue plunging 94% QoQ to merely RM114.9m as all operations were closed for almost the entire quarter, 2QFY20 core loss ballooned to RM793.2m from RM47.8m in the preceding quarter. In fact, at the adjusted EBITDA level, it turned into a loss of RM486.2m from profit of RM355.4m as all the three geographical location casinos reported losses. Meanwhile, associate Empire reported lower share of loss of RM78.6m from share of loss of RM100.1m in the preceding quarter.

… largely due to the lockdown. Similarly, YoY results were heavily impacted by the business closure as revenue plummeted 96% to RM114.9m from RM2.60b in 2QFY19 while 1HFY20 revenue contracted 61% to RM2.07b from RM5.34b. in terms of the bottom line, 2QFY20 and 1HFY20 registered core losses of RM793.2m and RM841.0m against net profits of RM359.7m and RM737.0m in 2QFY19 and 1HFY19 respectively. Meanwhile, there was a total of share of associates losses of RM178.7m in 1HFY20 against none last year as GENM only started recognising Empire account in 4QFY19.

A better 2HFY20 as businesses have re-opened. As Malaysia and UK operations have already re-opened, upcoming quarters should see better results than the dismal 2QFY20. Since the resumption of business from 19 Jun, RWG registered better visitor arrivals from 30,000/day initially to currently 45,000/day with 4,700 rooms opened currently as opposed to 1,800 rooms when it first re-opened. Nonetheless, the North America unit remains closed for now.

Expect a loss-making year in FY20. Management is looking to implement various aggressive cost control measures, among which includes the reduction of workforce to lower payroll. Meanwhile, the opening of its outdoor theme park is targeted in mid-2021 which is earlier than last quarter’s guidance of end-2021. Post-results, we are now forecasting a net loss of RM741m in FY20 from net profit of RM411.8m and cut FY21E earnings by 42% to factor in greater impact from the COVID-19 outbreak. We also cut FY20/FY21 NDPS to 5.0 sen/8.0 sen from 12.0 sen previously.

But still an OP for attractive valuation. Amidst earnings volatility, we believe its valuation remains attractive as FY20 is a wash-out year and a strong recovery is envisaged once the virus is subdued. Post earnings revision, our target price is reduced to RM2.75 from RM3.35, still based on 10% discount to its SoP valuation. OUTPERFORM rating is maintained. Risk to our call is slower-than-expected recovery in business volume from prolonged pandemic-related business disruption.

Source: Kenanga Research - 28 Aug 2020