GENTING’s 1HFY22 results disappointed as the recovery momentum at GENM fell short of expectations. Nonetheless, with the reopening of the economy and international borders, GENM’s prospects will continue to improve while GENP will continue to benefit from strong CPO prices. We cut our FY22F and FY23F earnings forecasts by 36% and 32%, respectively, lower our TP by 4% to RM5.86 (from RM6.12) but maintain our OUTPERFORM call.

1HFY22 results missed forecasts with core loss of RM15.1m against house/street’s FY22 net profit forecasts of RM1.19b/RM932.5m. The main variance between reported results and our forecasts are due to: (i) weaker-than-expected turnaround for 2QFY22 results at GENM (OP; TP: RM3.64), and (ii) our expected depreciation charges were understated as the reported charges in 1HFY22 of RM1.75b made up 64% of our FY22 depreciation assumption of RM2.73b.

Higher earnings in 2QFY22, due to improved earnings from Leisure Hospitality with adjusted EBITDA jumping 48% on higher casinos earnings across all geographical locations. GENM saw its adjusted EBITDA for Malaysia casino operations surging 74% while earnings for GENS (Not Rated) expanded 17%. Meanwhile, GENP’s adjusted EBITDA for plantation unit jumped 55% thanks to strong CPO prices of RM4,907/MT (+2% QoQ; 51% YoY). Power earnings tripled to RM135.3m helped by Banten Power Plant where it was under-scheduled for annual outage for 42 days. This narrowed 1HFY22 core loss to RM15.1m compared to core loss of RM111.0m in 1HFY21.

Cut FY22/FY23 earnings forecasts by 36%/32%, to adjust for: (i) lower GENM earnings on slower-than-expected recovery as well as higher interest cost, (ii) higher GENP (OP; TP: RM7.50)’s estimates on higher CPO prices, and (iii) higher Power earnings from Banten Power Plant.

A recovery play, OUTPERFORM maintained. GENTING is still a good pick for economy recovery play as its businesses should recover quickly from the lifting of cross-border restrictions. New casino RWLV could be a wild card judging from initial data. We lower our SoP-based TP to RM5.86 (from RM6.12) based on a 40% discount which encompasses: (i) a holding company discount for its listed entities, and (ii) a risk premium to reflect related party transactions. There is no adjustment to our TP based on ESG for which it is given a 3- star rating as appraised by us (see Page 5).

Risks to our recommendation include: (i) non-renewal of licenses; (ii) unfavourable prize payout ratios; (iii) weak consumer spending amidst high inflation; and, (iv) products perceived to be socially undesirable.

Source: Kenanga Research - 26 Aug 2022