Although 3Q18 core earnings matched expectations, the casino duties hike and termination of Fox Theme Park deal had badly dented sentiment, resulting in share price tanking 37% in the past month. With the dust yet to settle, it is hit again, with the huge RM1.83b impairment for the US Tribe’s promissory notes. We believe investors need time to regain confidence in the stock. Hence, we maintain MP on the stock at RM3.10 albeit attractive valuation.

3Q18 core earnings in line. GENM reported a shocking headline 3Q18 net loss of RM1.49b which was due to RM1.83b impairment on its investment in the promissory notes issued by the Mashpee Wampanoag Tribe to finance the Tribe’s development of an integrated gaming resort in Taunton, Massachusetts of which the USA government has concluded that the Tribe did not satisfy the conditions to allow the Tribe to have the land in trust for an integrated gaming resort development. Ex-EI, 3Q18 core profit of RM412.9m brought YTD 9M18 core profit to RM1.23b, which made up 77%/75% of house/street’s FY18 estimates, came within expectations. No dividend was declared in 3Q18 as it pays semi-annually dividend.

Operationally a strong quarter sequentially. Despite revenue rising 7%, 3Q18 core profit fell 8% to RM412.9m, mainly due to higher taxation by RM158.2m on change of basis of tax incentive utilisation coupled with non-deductible expenses. In fact, 3Q18 earnings at adjusted EBITDA level jumped 16% to RM814.8m due to stronger Malaysian operation by RM101.0m or 19% on higher business volume and higher hold percentage in the mid-to-premium business, and UK and Egypt by RM30.7m or 104% also attributed to higher volume and hold percentage at premium gaming business.

Home turf operation still led earnings growth. 3Q18 core profit jumped 78% from RM232.2m on the back of 15% hike in revenue owing to improved hold percentage in the mid-to-premium segment at home coupled with higher business volume from the mass market. The effect of GITP expansion program was also felt in the results. As such, EBITDA for Malaysia operation jumped 91%. Besides, lower operating loss from Bimini boosted North America unit’s earnings by 20% while the UK and Egypt operations also saw earnings growing 12%. YTD 9M18 core earnings leapt 45% to RM1.23b on the back of 9% rise in revenue, for the similar reasons as 3Q18.

Bad news stuck for three times on the row. Since the Budget 2019 announcement in early of Nov, share price of GENM had tanked 37% and it is likely to slide further today as the RM1.83b impairment is negative for sentiment. The fall in share prices started when the casino operator was slapped with 10% hike in casino duties during the announcement of Budget 2019, then the news of unexpected termination of Twentieth Fox Theme Park last week, which pushed the share price to multi-year lows. Although the impairment is one-off, we believe this will impact the already fragile sentiment further.

Cheap valuation but sentiment rules; maintain MP. We have adjusted our SoP valuation to: (i) assume full write-off the theme park’s capex so far of USD750m, and (ii) reflect the RM1.83b impairment mentioned above. This reduced our SoP valuation to RM4.45 from RM5.28. In view of the negative sentiment toward the stock, we increase our discount to 30% from 10%. Thus, our new target price is cut to RM3.10 from RM4.75 previously. We shall adjust the discount factor once sentiment improves. MARKET PERFORM retained. Risks to our call include the positive reversal of the above two negative factors.

Source: Kenanga Research - 03 Dec 2018