Genting Malaysia - More Empire Preference Shares

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Price Call: 
Last Price: 
-1.89 (39.46%)

GENM is planning to subscribe for additional USD100m preference shares in Empire Resorts Inc, a US gaming JV with the Genting’s founding Lim family. Despite the sensitivity of a related-party transaction, the proposal aims to bolster Empire’s balance sheet. We maintain our forecasts but tone down our TP by 5% from RM3.07 to RM2.90 and OUTPERFORM call to MARKET PERFORM.

Empire Resorts Inc (Empire). The Lim family is believed to have invested in Empire, which was listed then, in early 2009 before taking a controlling stake in 2016.

• Feb 2018 - Resorts World Catskill (RW Catskill), a casino resort sitting on 1,700-acre with 1,600 slot machines, over 150 tables and 332-all suite hotel opened 90 minutes away from New York City.

• March 2020 - US authorities suspended all gaming resort operations including RW Catskills to help contain the spread of COVID-19.

• Sept 2020 - RW Catskill resumed operation but on reduced capacity and restricted hours. Empire eventually reported positive EBITDA in 1QFY21 but continued to report net losses till 3QFY23.

• March 2022 - Mobile sports betting commenced in New York.

• Dec 2022 - Resorts World Hudson Valley (RW Hudson Valley) opened a 90,000 sf facility with 1,200 video lottery terminals.

GENM’s investment in Empire. In Nov 2019, GENM acquired 49% of Empire from the Lim family private vehicle, Kien Huat, for USD160m (RM661m) before proceeding to take Empire private. Since then, Kien Huat has invested USD524m in Empire while GENM has invested USD624m into common and preference shares to support Empire’s operations, expansion and refinancing. After this proposal, GENM would have invested USD724m in Empire and able to recognise 89.6% of Empire’s losses/profits, up from 76.3% previously. However, Empire will remain an associate of GENM as Kien Huat retains control over the board of Empire; hence, the sensitivity over the related-party nature of this investment.

No change to forecasts. We keep our FY23-24F earnings intact as GENM is essentially using its balance sheet to bolster an investment with 89.6% economic interest. More importantly, we expect Empire’s operations to gradually normalise with profits to show over the next 2- 3 years.

Downgrade from OUTPERFORM to MARKET PERFORM. We believe its key earnings driver, Resorts World Genting, is benefitting from the normalisation of domestic and regional travel. Visitors from China may still need time to recover to pre-pandemic level but the trajectory is encouraging thus far. As such, we continue to like GENM as an earnings recovery play. However, we are imputing a 5% discount to our previous SoP-driven TP of RM3.07 to arrive at a new TP of RM2.90 as we downgrade GENM’s ESG ratings from a neutral 3-star to 2-star rating (see Page 5).

Risks to our recommendation include: (i) non-renewal of licences, (ii) unfavourable prize payout ratios, (iii) weak consumer spending amidst high inflation, and, (iv) products perceived to be socially undesirable.

Source: Kenanga Research - 11 Jan 2024

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