RWG reported a surprisingly strong rebound in 3QFY20 EBITDA being flooded by locals as borders remain closed. But, this is unlikely to repeat in 4QFY20 given the on-going CMCO locally while the re-imposition of lock down in the UK and resurgence of new cases in North America will deter visitors. 2021 will be a recovery year before “business as usual” in 2022. We believe the recent strong price rebound should have priced in the earnings recovery. Thus, rating is cut to MP with a lower TP of RM2.60.

9MFY20 missed expectations. Although 3QFY20 core loss narrowed 45% QoQ to RM434.6m, 9MFY20 core loss of RM1.28b was higher than house/street’s FY20 net loss forecast of RM740.6m/RM824.3m. In our opinion, 4QFY20 is unlikely to be a strong quarter despite being a year-end season given the new CMCO in Malaysia currently and the re-imposition of lock down in UK as well as resurgence of COVID cases in the North America. However, 3QFY20 was a good quarter with solid RWG numbers. No dividend was declared as expected as it usually pays half-yearly dividend.

Losses narrowed… with revenue soaring 11x QoQ to RM1.42b from RM0.11b after the reopening in Malaysia and the UK. This helped to reduce core loss to RM434.6m from RM793.2m previously. In fact, at the adjusted EBITDA level, it was positive at RM310.7m from LBITDA of RM486.2m, thanks largely to a strong recovery in RWG with EBITDA of RM424.7m. Management indicated that although it operated at 50% capacity, business volume was 70% of pre-MCO level. However, both UK and North America units still posted adjusted LBITDA with narrowed losses. Meanwhile, associate Empire also posted narrowed share of loss of RM62.0m from RM78.6m.

…solid rebound in RWG earnings. Despite reporting losses YoY, RWG posted only a 21% decline in adjusted EBITDA from RM537.5m in 3QFY19, largely thanks to the mid-to-premium segment where business volume was relatively at the same levels despite operating at 50% capacity. YTD, 9MFY20 core loss of RM1.28b was posted against core profit of RM1.09b in 9MFY19 as revenue declined 56% over the period. Meanwhile, there was a total of share of associates’ losses of RM240.7m in 9MFY20 against none last year as GENM only started recognising Empire’s equity accounting in 4QFY19.

4QFY20 unlikely to be a seasonally strong quarter. 3QFY20 results came as a surprise as casino operations experienced strong rebound in business volume from the locals as cross border travel remains closed. However, with the on-going CMCO in Malaysia, lock down re- imposition in the UK as well as the resurgence of COVID-19 in North America, 4QFY20 is unlikely to experience strong volume as in 3QFY20, despite being in the year-end holiday season. We believe 2021 will be a recovery year before a full recovery in 2022. Post- 3QFY20, we widened our FY20 net loss to RM1.36b from RM740.6m after adjusting for a stronger RWG earnings but imputing more losses for the UK and North America operations. We also cut FY21 estimates by 9% for the same basis as FY20.

Cut to MP on the recent price rebound. While the business reopening previously showed a strong volume rebound for GENM, we believe the recent strong price rebound has priced in the earnings recovery. As such, we downgrade the stock to MP from OP with a lower target price of RM2.60, post earnings revision, from RM2.75 based on unchanged 10% discount to its SoP valuation. Risk to our call is slower- than-expected recovery in business volume from business disruption.

Source: Kenanga Research - 27 Nov 2020