GENTING’s 1HFY23 results disappointed. GENS did better, GENP met expectations while GENM missed earnings. We like GENTING as a proxy to the reopening of international borders and the rebound of the tourism industry. Nonetheless, we cut our FY23F and FY24F net profit forecasts by 20% and 8%, respectively, lower our TP by 8% to RM5.20 (from RM5.66) but reiterate our OUTPERFORM call.

Its 1HFY23 core profit of RM235m disappointed, making up only 24% and 23% of our full-year forecast and the full-year consensus estimate, respectively. The variance against our forecast came largely from weaker-than-expected earnings from GENM (OP; TP: RM3.07). Nevertheless, GENTING declared a 6.0 sen interim dividend which is just a tad lower than the 7.0 sen interim dividend paid out last year.

YoY, its 1HFY23 revenue jumped 26% as Malaysia and Singapore reopened its border from April 2022, lifting revenues at GENM as well as GENS by 32% and 74%, respectively, even as GENP’s revenue eased 12% on weaker upstream and downstream operations as well as margins. The power division’s revenue also picked up as demand from its China and Indonesia plants improved while coal prices in China declined in 2QFY23. All in all, GENTING reported a core net profit of RM235m, a sharp turn around from last first half net loss of RM15m.

QoQ, its 2QFY23 revenue grew 14% as better revenue from casino operation (+12%) due to the return of foreign tourists and a doubling in room sold at GENM’s Resort World at Genting. GENP also saw better QoQ revenue and so did the power division on higher offtake in China. However, 2QFY23 EBITA, EBIT and core net profit were more muted due largely to RM261m in FX loss on translation of USD debts drawn by GENM.

Forecasts. We cut our FY23F and FY24F earnings by 20% and 8%, respectively, to reflect lower earnings from GENM but keep our 16.0 sen NDPS forecast unchanged.

We continue to like GENTING as a proxy to the reopening of international borders and the return of mainland Chinese tourist. Moreover, while revenue at GENS and GENM have recovered strongly, GENM’s earnings were weigh down by aggressive marketing and promotions as well as the recruitment and retraining of personnel as business units such Resort World Genting reopen more hotel rooms and casino capacity. As such, we believe it is a matter of time when GENM’s margins will revert to more normal levels as such costs abate.

Nonetheless, following our earnings revision, our new SoP-based TP is reduced from RM5.66 to RM5.20 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 (see Page 3). 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