Genting Malaysia (GENM) took preventive measures to protect guests and its staff at Resorts World Genting (RWG) by cancelling February’s tour bookings from China, despite no reported cases at the property so far. Yesterday, GENM extended its losing streak, falling another 1.0% to RM2.94.

In a report dated 5 Jan, Macquarie Equities Research (MQ Research) views that the ongoing sell-off is overdone and expects the shares to improve once the coronavirus sentiment improves. Outperform rating is maintained with a target price of RM3.75.

China Tours Cancelled

• On February 4, GENM announced cancellations of all tour bookings from China for the month of February. The restriction applies to RWG (~80% of GENM total earnings before interest, tax, depreciation and amortization (EBITDA)). Meanwhile, there have not been any coronavirus cases reported at the property.

• GENM has among the least exposure to Chinese visitors relative to Asia gaming peers, as MQ Research believes Chinese visitors contribute just ~9% of RWG visitation. Meanwhile, MQ Research believes the contribution to overall revenue is materially less than 9%, given VIPs and Premium Mass players (~40% of gross gaming revenue (GGR)) are less likely to visit the property via tour groups but rather on an individual basis.

Transitory Headwinds

• GENM shares have declined 13% since January 20 (KLCI -4%), which MQ Research believes implies an impairment to all future free cash flow (FCFs), despite coronavirus headwinds only being transitory. Meanwhile, shares of Genting Singapore (GENS SP, S$0.85, Neutral, TP: S$0.95 ) shares are down ~8% (STI -2%), despite ~30% revenue exposure to China vs GENM’s < 10%. On January 31, Singapore barred entry to all visitors from Mainland China except Singapore permanent residents.

• Even in a draconian scenario in which RWG EBITDA is -25% in 2020, assuming a recovery in 2021 this implies a write-down of RM575m EBITDA vs prior expectations, or just a 3% impairment to GENM’s market value before coronavirus fears erupted.

Action and Recommendation

• MQ Research views GENM’s ongoing sell-off as a dislocation from fundaments. While MQ Research acknowledges poor sentiment alongside coronavirus fears, MQ Research would also expect GENM shares to begin rerating immediately after coronavirus sentiment begins to improve. Investors should acknowledge that GGR typically rebounds very quickly after short-term displacements, with pent-up demand being released quickly.

• MQ Research is maintaining an Outperform rating and RM3.75 target price, which implies 26% upside potential in addition to a 6% dividend yield.

12-month Target Price Methodology

• GENM MK: RM3.75 based on a EV/EBITDA methodology
• GENS SP: S$0.95 based on a EV/EBITDA methodology

Source: Macquarie Research - 6 Feb 2020