Genting  Malaysia’s  9M14  core  earnings  of  MYR950.5m  fell  below expectations due to subpar VIP holds in Malaysia, while its US segment continued  to  face  headwinds  from  Bimini  losses.  Maintain  NEUTRAL with our SOP-based TP reduced to MYR4.21 (3% upside).  We lower our FY14 EPS by 5.6% and reduce our FY15-16 EPS forecasts by 7.1-9.2% to factor in the impact from the GST implementation come Apr 2015. 

Results  review.  Genting  Malaysia’s  9M14  revenue  shed  0.6%  YoY  to MYR6.17bn,  dragged  down  by  lower  VIP  win  rates  at  its  Malaysia operations. EBITDA slid 10.2% YoY to MYR1.64bn with overall margin at 26.6% (vs 29.5% in 9M13), eroded by higher payroll costs under its New York  casino  while  its  Bimini  casino  registered  an  EBITDA  loss  of MYR116.1m.  All  in,  9M14  core  earnings  of  MYR950.5m  (-26.6%  YoYpartly  due  to  a  below-average  effective  tax  rate  in  9M13)  fell  short  of expectations, making up 66.9% of our and 67.6% of consensus full-year forecasts. 

Updates on Malaysia.  9M14 EBITDA margin at its Malaysian operation would  have  stood  at  37.0%  vis-à-vis  34.6%  currently,  had  its  VIP  luck factor held up  in 3Q14. We estimate that this would translate into  9M14 core earnins of MYR1.02bn-1.13bn.  3Q14 visitor arrivals continued the downtrend, dropping  3%  YoY  as  foreign tourists’ visitation  slipped  14% YoY.  Its  proposed  MYR5bn  Genting  Integrated  Tourism  Plan  remains largely on track. Of note, 500 new rooms will be available by end -2014 with another 800 to come online by mid-2015.  Management also noted that renovation of its existing hotel rooms is ongoing.

Forecasts  and  risks.  We  cut  our  FY14  EPS  by  5.6%  to  factor  in  its subpar luck factor YTD.  We also reduce  our FY15-16  EPS by  7.1-9.2% to take  into account  the  implementation of the  6%  goods and services tax (GST)  come Apr 2015.  Key risks include  fluctuations in luck factor,prolonged losses at Resorts World Bimini, and  a potential hike in casino taxes.

Maintain  NEUTRAL.  We  tweak  our  SOP-based  TP  lower  to  MYR4.21(from  MYR4.40)  following  our  earnings  revision  and  after  adjusting  for the  current  market  value  of  its  listed  associate  in  the  17.8%-owned Genting Hong Kong (678 HK, NR)  as well as its latest net cash balance.Given the limited upside, we maintain our NEUTRAL call.

Updates  on  US.  Its  Resorts  World  Bimini  targets  to  break  even  come  FY15.  To achieve that, management is looking to increase its hotel room offerings on the island with a capex allocation of USD200m for FY14F and FY15F. The recent completion of its  deep-water  jetty in Sep  2014 would allow larger ferries to  disembark directly onthe  island.  We  remain  hopeful  that  Bimini  will  likely  break  even  by  3Q15.  On  its existing New York operations, management is streamlining its workforce to optimise labour costs following the renewal of its labour union agreement in Oct 2013.New  York  tender  results  by  end-2014.  In  3Q14,  the  group  incurred  a  one-off MYR40m  expenses  on  the  application  for  casino  licences  in  New  York  upstate. Management  guided  that  the  state’s  Gaming  Facility  Location  Board  is  currently evaluating all the  16 bids submitted and expects the results to be known by as soon as  Dec  2014.  Local  media  meanwhile  reported  that  the  final  results  could  be announced by mid-Dec, citing comments from the state’s Gaming Commission. GST  implementation.  Management  confirmed  that  its  Malaysian  casinos  will  be subjected to an additional 6%  GST  on top of the 25% gaming tax that the group is currently  paying  on  its  casino  winnings.  This  prompted  us  to  reduce  our  FY15-16EPS  forecasts  by  7.1-9.2%. Upon  implementation  of  the  GST  come  Apr  2015,  we expect EBITDA margin for its Malaysian operation to hover around 32-35% (from the typical 36-38% that management  previously guided under normalised VIP hold rate of 2.85%).   

Source: RHB