This article first appeared in The Edge Financial Daily on August 14, 2019
KUALA LUMPUR: Genting Malaysia Bhd’s (GenM) proposed acquisition of a 46% stake in loss-making Empire Resorts Inc, resulting in a selldown of GenM shares last week, saw renewed selling yesterday following news that Empire’s liquidity problem is prompting it to consider filing for voluntary bankruptcy in the US.
At the close of trading, GenM was down 3.11% or 10 sen at RM3.12, shaving its market capitalisation by some RM600 million to RM18.53 billion.
It was the seventh-most traded counter on Bursa Malaysia, with 44.87 million shares done. Its parent, Genting Bhd, similarly retreated 2.26% or 14 sen to RM6.05, trimming its market value to RM23.46 billion, after 10.09 million shares crossed.
Speaking to The Edge Financial Daily yesterday, an analyst, declining to be named, said the related party transaction (RPT) is “not expected to create value” for GenM shareholders, adding “nobody likes an RPT, especially an RPT involving the sale of family (the Lims) asset to the listed company (GenM)”.
He also said plans for Empire are unknown, so it is hard to forecast if the asset will eventually become profitable, in view of its current financial position.
Empire’s indirect wholly-owned Montreign Operating owns and operates Resorts World Catskills, a casino resort on a 1,700-acre (687.97ha) site of a four-season destination resort in Sullivan County, New York, and about 144.84km from New York City.
Since its opening in February 2018, the casino’s revenues have not surpassed costs. In the six months ended June 30, Empire generated a net loss of US$73 million. Its long-term debt now stands at US$533.68 million.
The Nasdaq-listed company told shareholders, in a filing with the US Securities and Exchange Commission last Friday, that it is in dire need of fresh capital through a cash call, or a restructuring of its debt.
In a note yesterday, Alliance DBS Research described GenM’s acquisition of a 46% stake in Empire as “an undesirable acquisition” as it has the potential to dilute GenM’s value and earnings.
“Our major concerns are if the group is unable to turn around Empire’s earnings and losses are sustained in 2020 as well, there is a more than 20% downside risks to our financial years 2020 and 2021 earnings estimates, and in view of Empire’s dire financial position, a further capital injection may be needed after a privatisation by GenM to meet its financial obligations,” it said.
It is maintaining its fully valued call on GenM, adding the acquisition presented a further downside risk to its target price (TP) of RM3.15, which it is reviewing together with its earnings estimates for GenM.
According to Bloomberg, as of yesterday, GenM had a 12-month consensus TP of RM3.76, with five “buy” calls, seven “holds” and seven “sells”. Genting, as of last Wednesday, had a 12-month consensus TP of RM7.94, with 12 “buys”, four “holds” and one “sell”.
After GenM announced last Tuesday that it was planning to fork out US$128 million to buy the stake in Empire from its controlling shareholder and chairman Tan Sri Lim Kok Thay, it saw RM2.6 billion in market capitalisation wiped out in a day as its share price sank to RM3.08, before regaining some losses to end the week at RM3.22. Lim currently controls 84% of Empire via Kien Huat Realty III Ltd.