1QFY22 turned loss-making again on lower casino earnings coupled with higher opex and a one-off higher interest expense. However, with borders reopening from April 1 and most countries entering endemic phase, forward earnings will only get better. Maintain OUTPERFORM with a lower target price of RM3.71.

1QFY22 below expectations. After the first profitable quarter within the COVID-19 affected two years span, 1QFY22 turned loss-making again with core loss of RM103.8m against house/street’s FY22 net profit forecast of RM1,047.1m/RM786.8m. This was due to a 63% or RM65.6m jump in interest expense and an overall broad-base earning decline for all geographical casino operations. No dividend was declared during the quarter as expected as it usually pays half-yearly dividend.

One-off interest expense hit. 1QFY22 turned into core loss of RM103.8m from core profit of RM306.6m in the preceding quarter largely due to the abovementioned interest expense while adjusted EBITDA for Malaysia operation fell 27% on lower hold percentage with higher opex for the preparation of reopening while the higher non-VIP mix of 45:55 from 37:63 coupled with the lower percentage contributed to lower EBITDA margin of 29% from 37%. Meanwhile, the UK and the North American operations also saw earnings declined 53% and 33%, respectively, also due to similar reasons of higher opex.

But it is on the recovery’s path. Compared to last year, 1QFY22 core loss of RM103.8m was much lower than RM426.3m posted in the same period last year. This was because of there were a one-month MCO 2.0 lockdown last year in Malaysia while all the land-based casinos in the UK were also closed last year. As such, Malaysia and the UK reported profit of RM262.9m and RM84.7m from losses of RM83.6m and RM51.7m last year, respectively. Meanwhile, the North America unit continued to show improvement with earnings growing 14% over the year.

A better quarter ahead. With more countries in transition to endemic phase, Malaysia included, from April 1, we believe forward earnings will get better. Meanwhile, the new Genting SkyWorlds Theme Park, which started operations in early Feb, will broaden its non-gaming revenue base. Post 1QFY22 results, we cut FY22-FY23 estimates by 29%-9% to reflect the one-off higher interest expense in 1QFY22 while we have also trimmed casino operations’ contributions slightly. Nonetheless, we keep our NDPS assumption of 12.0 sen unchanged.

OUTPERFORM maintained at RM3.71. As most borders have already reopened from April 1, we believe RWG should benefit and recover swiftly from the dismal earnings suffered in the past two years. As such, we keep OUTPERFORM on the stock with a lower SoP driven target price of RM3.71 from RM3.83 previously. Risk to our call is a slower-than-expected recovery in business volume caused by fresh disruptions.

Source: Kenanga Research - 27 May 2022