Review

• Stripping out the provision for theme park termination related costs (RM198.3mn), pre-operating expenses (RM150mn), gain on disposal of UK subsidiary (RM123.8mn) and other exceptional items, Genting Malaysia (GENM) reported a higher-than-expected 1H19 core profit of RM935.2mn, accounting for 92.0% of our full-year forecast and 75.5% of consensus estimates. The variance was largely due to an exceptionally high hold percentage from the mid to premium players segments. For this quarter, the group declared an interim single-tier dividend of 6sen, which was same as 1H18.

• The exceptionally high hold percentage for 1H19 came at the expense of lower gaming volume. Based on GENM’s rolling program, the volume declined by 17% YoY in 2Q19 and 25% in 1H19 after the group reduced the rebates. According to management, based on a normalised hold percentage, 1H19 adjusted EBITDA from Malaysian operations would have declined by 12% vs a reported 2% rise in adjusted EBITDA.

• On the group as a whole, 1H19 adjusted EBITDA increased by 6.6% on the back of 10% rise in revenue. The increase in EBITDA also contributed by UK and US operations with respective EBITDA growth of 43.3% and 18.4%, stemming from 1) the adoption of MFRS 16 (for UK operations); 2) lower losses from Bimini operations and strengthening of US$ against RM.

Impact

• We raise FY19 core profit by 32.6% after: 1) raising VIP win percentage by 1%-pt to 3.5%; and 2) revising VIP volume growth from -2% to -10%. However, we cut FY20-21 earnings by 28.5% and 19.8% respectively after: 1) incorporating its share of losses of RM308mn and RM205mn from Empire Resorts’ FY20-21 estimated losses of USD150mn and USD100mn.

Conference call highlights

• Management does not provide much clarity about its investment in Empire Resorts given that the privatisation exercise is still on-going. However, management indicates that the exercise is expected to complete by end-FY19. Also, we could expect some capex to be spent in the future to recapitalise Empire Resorts.

• With regards to outdoor theme park, there would be no significant capex needed as most of the infrastructures have been completed. The theme park is targeted for opening in 3Q20.

Valuation

• Given the change in earnings projections, we cut GENM’s DCF valuation to RM3.30/share (from RM3.47 previously). However, given the sharp fall in share price (app.15%) post the announcement of JV investment in Empire Resorts, we think the market has sufficiently priced in near-term earnings risks from this JV. As such, we upgrade GENM to Hold (from sell previously).

Source: TA Research - 30 Aug 2019