■ GENM raises its effective stake in ER from 66.6% to 76.3%, after buying Series F Convertible Preferred Stock from KHR for RM438.5m.
■ This is negative as we expect ER to remain loss-making over the next 5 years. GENM’s net debt/EBITDA by end-FY23F could rise from 2.5x to 2.6x.
■ Reiterate Add. SOP-based target price trimmed to RM3.25.

GENM raises effective stake in Empire Resorts for US$100m

Genting Malaysia (GENM) entered into a SPA with Kien Huat Realty (KHR) to purchase Empire Resorts' (ER) entire 1,510 Series F Convertible Preferred Stock (Series F) from KHR for a total consideration of US$100m (RM438.5m). This acquisition will be funded via GENM’s internally generated funds and will bring its total investment in ER from US$524.4m to US$624.4m (RM2.7bn, 48 sen per GENM share) to date.

Negative as we project ER to be loss-making over the next 5 years

Assuming full conversion of the entire Series F, Series G and Series L into common stock, GENM’s effective shareholding in ER will be approximately 76.3% (vs. 66.6%) previously. We see this acquisition as a negative development for GENM as we project ER to still be loss-making over the next five years and this acquisition increases our projected net debt/EBITDA for GENM by end-FY23F from 2.49x to 2.63x.

Future outlook uncertain pending New York casino licence outcome

YTD, Resort World Catskills’ (RWC) gross gaming revenue (GGR) and EBITDA have been improving, with GGR up 13.2% yoy and EBITDA doubling yoy in 9M22. The expected opening of Resorts World Hudson Valley (RWHV) in Dec 22 may also further improve ER’s financial performance. However, its medium- to longer-term outlook is difficult to ascertain, as it may be negatively affected by the issuance of up to three New York downstate full casino licences in 2023 [with two potential front runners, Resorts World New York City (RWNYC) and Empire City Casino, able to commence full casino operations quickly being existing video lottery terminal facilities]. This could lead to potential cannibalisation of RWC and RWHV, which are located only 1-2 hours away from New York City.

Reiterate Add, with a slightly lower SOP-based TP of RM3.25

We trim GENM’s TP slightly to RM3.25 after factoring in its US$100m Series F acquisition and FY22-24F earnings by 0.3%-0.4% (higher net debt). If GENM buys out KHR’s remaining 23.7% effective stake over time, it may have to fork out a further US$244.3m (RM1.07bn), based on this latest valuation of ER shares. This would further lower GENM’s fair value to RM3.08 (including 15% holding company discount). Meanwhile, winning a New York downstate casino licence could enhance its fair value by 44-51 sen/share. Key potential re-rating catalysts: FY22F earnings recovery and RWNYC winning a New York downstate full casino licence. Its FY23F adj. EV/EBITDA of 6.9x is 1.0 s.d. below the historical pre-Covid-19 mean, with decent FY22-24F yields of 5.6-7.8% p.a. Downside risk: further Covid-19-led resort closures.

Source: CGS-CIMB Research - 6 Dec 2022