Favourable odds for Genting Malaysia

Genting Malaysia Bhd (Sept 19, RM4.61)

Reaffirm buy with unchanged target price (TP) of RM5.00: We remain positive on Genting Malaysia Bhd (GENM), which is due to open new facilities including the podium by end-2016. With revised marketing strategies and tighter credit control, we expect its UK operations to remain stable. In the US, we see potential upside from additional slot machines by 2019.

We understand from management that the opening of new key facilities (new cable car system, Sky Avenue and Sky Plaza shopping mall, and multistorey car park) with regard to the Genting Integrated Tourism Plan (GITP) is on track for a soft opening by year end. The podium, which houses additional gaming capacity, should also be ready by year end. We see this as a key catalyst since domestic operations account for circa 80% of group earnings. The 20th Century Fox World theme park is scheduled to open by end-2017.

We are positive on the revised marketing strategies adopted in the UK, which we believe have helped to grow the premium mass segment and mitigate the year-on-year (y-o-y) decline in VIP volume, which clocked -30% in the second quarter of financial year 2016 (2QFY16) and -40% y-o-y in 1QFY16. Together with a better luck factor and tighter credit control, this has led to much better results from the UK where its first half of financial year 2016 (1HFY16) grew 59% y-o-y and a more balanced split in gross gaming revenue between mass and VIP.

We expect losses to narrow at Bimini, which saw a loss of US$31 million (RM128 million) in 1HFY16 and a loss of US$30 million in 1HFY15, with room capacity and without the costly in-house ferry operations. Management is still negotiating with third-party ferry providers and expects to start new services soon. In the longer term, we see upside in the US operations from the proposed US$400 million expansion of New York Racino that includes an expansion of 1,000 slot machines by April 2019. The New York State Franchise Oversight Board is reviewing the proposal.

We like GENM for the potential in earnings growth from additional gaming facilities and non-gaming revenue such as retail and theme parks. Our revalued net asset valuation-based 12-month TP of RM5.00 implies a 2017 estimate of price-earnings ratio (PER) of 17.8 times, which is comparable to forward PERs of US gaming companies and lower than that of Genting Singapore. Potential catalysts for GENM include the commissioning of the podium in 2HFY16 and the opening of the Fox World theme park in 2017. The risk is delays in execution of GITP. — Affin Hwang Investment Bank, 16 Sept 2016

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This article first appeared in The Edge Financial Daily, on Sept 20, 2016. Subscribe to The Edge Financial Daily here.