GENM’s 1HFY23 results disappointed with a loss. While the tourist arrivals at its Malaysian operations grew 10% YoY, and its US operations saw better performance, its UK operations weakened further. Not helping either, margins were compressed by high marketing and staffing costs. We cut our FY23F and FY24F net profit by 33% and 15%, respectively, reduce our TP by 14% to RM3.07 (from RM3.56) but maintain our OUTPERFORM call.

It disappointed with a 1HFY23 core net loss of RM99.7m, vs. a full year profit we and the market had expected. It dipped into the red in 1HFY23 on higher operating cost as well as due to forex losses of RM261m in the 2Q. It reported a 2QFY23 core net loss of RM112m, from a profitable quarter a year ago.

Resorts World Genting (RWG)’s earnings came in stronger QoQ and YoY despite the Chinese New Year effect in 1Q. Footfall rose 10% at the hilltop, thanks to good demand and more rooms being made available and sold. New assets in the US and post-Covid normalisation in the Bahamas also lifted earnings QoQ and YoY but UK’s underlying business weakened with earnings aided by favourable exchange rates. GENM declared a 6.0 sen interim dividend (flat YoY).

Outlook. We are toning down our FY23-24F earnings to reflect the weak 2Q and 1H of FY23 but remains optimistic of a recovery:

a) RWG saw 12m visitors in 1HFY23 (+20% YoY) which are still about 10%-20% below pre-pandemic level. As such, we believe RWG still has room to grow. Moreover, we suspect RWG is only starting to manage yields so as to achieve higher spending per visitor. Footfall wise, except for mainland Chinese, local crowd has returned along with Singaporeans but promotional and marketing spending look set to stay high along with rising personnel costs. As such, despite recovering revenue, margins are likely to stay tight, which is weigh down on FY23-24F CNP growth.

b) North American contributions have surpassed pre-pandemic level, thanks in part to earlier post-Covid relaxation in US (mid 2021). Firm consumer spending and capacity expansion also helped. Better earnings from RW New York City are likely due to the opening of Hyatt Regency JFK Airport in Aug 2022. 49%- associate Empire has also launched Resorts’ RW Hudson Valley in Dec 2022 and is now breaking even. However, despite the revenue uptrend, FY23-24F earnings are likely to stay muted due to heavy marketing spending to raise the awareness of these new assets.

c) However, its UK operation is facing headwind as inflationary pressures and weak consumer confidence dampened volume.

OUTPERFORM reaffirmed. GENM is already benefiting from tourism rebound at RWG even if the mainland Chinese has yet to return to pre-pandemic level. New assets at RWG and in US are also supportive of stronger revenue ahead but earnings are lagging due to promotional cost as well as the need to recruit more personnel. We are downgrading SoP-driven TP to RM3.07 from RM3.56 to reflect lower earnings but keeping our OUTPEROFM as revenue is recovering and earnings should follow likewise over time. There is no adjustment to our TP based on ESG 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 - 25 Aug 2023