Genting Malaysia Bhd
(Feb 8, RM5.34)
Maintain hold with unchanged target price (TP) of RM5.45: We recently met up with the group to discuss Genting Malaysia’s (GENM) near-term earnings prospects, which mainly centred on the timeline for the opening of its multi-year renovation and development of the Genting Integrated Tourism Plan (GITP) project, as well as key strategies for 2018. In our view, we think that the escalating operating and depreciation costs could outpace GENM’s revenue growth from its new facilities in the near term, thus putting pressure on margins, at least for first half 2018 (1H18).
Following lacklustre earnings over the past few quarters (due to a poorer VIP hold rate percentage), we believe that there could be a sequential improvement in GENM’s earnings in fourth quarter of financial year 2017 (4QFY17). This is on the back of the normalisation of VIP win rates, tracking closer to its theoretical rate of circa 2.5% to 3%, and seasonally higher business volumes for both the VIP and mass market due to year-end holidays and festivities.
To recap, 3Q17 VIP volumes were up double-digit while non-VIP volumes were up single-digit quarter-on-quarter.
Outdoor theme parks are to be the crown jewels for non-gaming assets. GENM is aiming to re-open part of its indoor theme park (closed since April 2017), which will feature 18 new rides, before the 2018 Chinese New Year festivities (in mid-February). It will also be fully operational by end 1H18. Nonetheless, the group still thinks that the catalytic crowd-puller for its non-gaming assets would be its 20th Century Fox outdoor theme park, which will be ready to open by end-2H18. Going forward, we think that the latter could further boost visitor arrivals and as such, casino visitations and revenues.
The next big target market is China. Over the past few years, GENM has focused more on rewarding existing Resorts World Genting members (which typically carry higher yields) rather than foreign visitors, particularly Chinese tourists. This has proven effective as 3Q17 mass market volume grew circa 10% year-on-year (y-o-y) from flat to 1% over the past few quarters.
Nonetheless, GENM has shared that it will begin ramping up its efforts in marketing to Chinese tourists by 2H18, leading up to the opening of its outdoor theme park, which should drive more overall foot traffic.
We make no changes to our FY17 to FY19 earnings forecasts. We are expecting the group to chart earnings growth of 24% y-o-y for FY18 on the back of normalising VIP hold rates as well as gaming volumes for its casinos in Malaysia. Nonetheless, we retain our hold call as we think that GENM’s short-term earnings growth from the new GITP has been priced in its valuations at nine times calendar year enterprise value/earnings before interest, taxes, depreciation and amortisation (EV/Ebitda) in line with GENM’s 10-year EV/Ebitda mean. Our revalued net asset valuation based TP of RM5.45 remains unchanged.
Key upside risks include higher-than-expected visitor arrivals for both its domestic and regional operations, and a better luck factor while downside risks include higher-than-expected start-up operating and depreciation costs for its newly-opened GITP facilities. — CIMB Investment Bank Bhd, Feb 7