Review

• Stripping out provisions and reversal made on outdoor theme park, impairment loss of investment in promissory notes issued by Mashpee Wampanoag Tribe (RM1.8bn) last year, gain on disposal of UK subsidiary (RM123.8mn) and other exceptional items, Genting Malaysia (GENM) reported a higher-than-expected 9M19 core profit of RM1.3bn (+7%), accounting for 95.5% of our full-year forecast and 96.6% of consensus estimates. The variance was largely due to higher-than-expected hold percentage and also better-than-expected GBP performance against MYR.

• GENM’s 3Q19 EBITDA dropped by 14.8% YoY despite a marginal 1.1% increase in revenue. The earnings decline can be attributed to increase in gaming tax, which ate into Resorts World Genting’s earnings. Also, Hurricane Dorian that hit the Bahamas and higher payroll cost from Resorts World New York City (RWNYC) contributed to weaker earnings too. This was partially mitigated by increased contribution from UK and Egypt operations due to adoption of MFRS16 and lower bad debts.

• For Malaysia operations, in spite of the fact that VIP and mass volume declined by 9% and 5% YoY respectively in 3Q19, the higher hold percentage in the mid to premium players segments had lifted 3Q19 revenue higher YoY to RM1.8bn (+5.4% YoY). However, 3Q19 EBITDA contracted by 16.2% YoY to RM537.5mn owing to the rise in gaming tax in 2019. On a hold-adjusted basis, 3Q19 would have declined by approximately 23.9% YoY.

• 3Q19 non-gaming revenue increased by 36% YoY as those new attractions under GITP have been well received. Hotel occupancy rate declined slightly to 95% in 3Q19 compared to 98% last year and the average room was higher at RM220/night in 3Q19 versus RM100/night last year. The increase in room rate was also a factor contributing to decline in mass volume mentioned above.

Impact

• We raise FY19/20/21 core profit by 29.6/19.2/15.7% after: 1) raising VIP win percentage by 0.5%-pts to 4.0% for FY19; 2) lowering our loss assumptions on Empire Resort to US$70mn and US$20mn for FY20 and FY21 respectively (from USD150mn and USD100mn losses previously); and 3) revising our GBPMYR exchange rate to RM4.4 (from 4.3 previously).

Conference call highlights

• Empire Resorts has ceased trading on the NASDAQ on 15 Nov 2019 upon the privatisation exercise from Kien Huat Realty and GENM. GENM will effective own 49% of interest in Empire Resorts while Kien Huat Realty will own the balance 51%.

• Empire Resorts reported a cumulative net loss of US$100.1mn for 9MFY19. The accumulated deficit as at Sep-19 amounted to US$540.1mn. Total current assets were 46% lower than total current liabilities. According to management, there will be some synergies between Empire Resorts, which is located in the Catskill Mountain 90 miles from New York City, and RWNYC in terms of joint marketing initiatives. For the time being, the immediate savings would be from the reduction in corporate costs. Management expected Empire Resorts to break even next year.

• GENM has already spent RM8.4bn out of total RM10.4bn earmarked for GITP development. 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

• Taking this opportunity to revise our risk-free rate assumption lower to 3.5% to be in line with our in-house forecast, we cut GENM’s DCF valuation to RM3.27/share (from RM3.30/share previously). Maintain Hold on GENM.

Source: TA Research - 29 Nov 2019