The 2QFY20 core loss of RM516.5m came in worse than expected, hit hard by COVID-19 impact as all its casino operations were loss-making. With business activities slowly resuming, the coming quarterly results should improve but remain challenging as cross-border restrictions will continue to pressure casino operations especially GENS. Going forth, the on-going COVID-19 pandemic will continue to be a major earnings disrupter. Nonetheless, we keep the stock as OP for its deep value with a lower TP of RM5.10.

2QFY20 results below. 2QFY20 turned into the red with core loss of RM516.5m and turned 1HFY20 to core loss of RM120.9m against house/street’s FY20 net profit forecasts of RM1.07b and RM0.51b. The dismal results were attributable to worse-than-expected impact from the COVID-19-led business closures on its casino operations in GENS and GENM. Despite this, it declared an interim NDPS of 6.5 sen (ex date: 10 Sep; payment date: 01 Oct) in 1HFY20 which is the same as 1HFY19.

Earnings hit by business closures… 2QFY20 turned to a core loss of RM516.6m from core profit of RM395.7m in 1QFY20 as revenue plunged 73% owing to the suspension of casino operations on a worldwide lockdown throwing all its casino units into losses. Besides, GENP reported lower earnings on lower CPO and PK prices by 11% and 19%, respectively. Oil & gas unit also saw lower EBITDA by 25% due to lower oil prices.

… as it turned loss-making. Similarly, on YoY comparison, the COVID-19 impacted results badly with 2QFY20 and 1HFY20 core losses of RM516.6m and RM120.9m from core profits of RM543.5m and RM1.28b in 2QFY19 and 1HFY19, respectively. Although most units reported lower earnings, plantation stood out with improved earnings by 33% in 2QFY20 and 16% in 1HFY20 owing to strong CPO and PK prices by 20%/20% and 26%/21%, respectively.

Coming quarters to improve. With its group of casinos around the world re-opened except the North American casinos, coming quarters should see improvement although the going remains challenging as most borders remain closed while social distancing measures do not favour casino operations. Post 2QFY20 results, we now expect net loss of RM315m in FY20 from net profit forecast of RM1.07b while FY21E earning is cut by 40% to account for greater impact from the COVID-19 on GENM and GENS. However, no changes to GENP’s forecasts. We also cut FY20 NDPS to 12.0 sen from 15.0 sen but keep FY21 NDPS at 15.0 sen.

Still OUTPERFORM for deep value. Although plagued by near-term distressed earnings, we believe it should recover quickly once travelling restrictions are uplifted and GENTING should be thus viewed as a recovery play. As such, we continue to rate the stock OUTPERFORM with a lower target price of RM5.10 based on 5-year mean discount of 42.7% to its SoP from RM6.00 which was based on 5-year average of 42% discount to its SoP. Risk to our call is a prolonged COVID-19 pandemic continuing to restrict travelling and hence affects its casino operations.

Source: Kenanga Research - 28 Aug 2020