This article first appeared in The Edge Financial Daily on August 28, 2017

Genting Malaysia Bhd
(Aug 25, RM5.82)
Maintain hold with a lower target price (TP) of RM5.96: Genting Malaysia Bhd registered a second quarter of financial year 2017 (2QFY17) core net profit (CNP) of RM271.5 million (44.5% year-on-year [y-o-y]), which brought the first half of FY17 (1HFY17) CNP to RM619 million (6.6% y-o-y). This was below market expectations and ours, making up 38% and 36% of the full-year estimates respectively. The 1HFY17 earnings decline was mostly caused by: i) higher operating costs incurred by its Malaysia business due to its new properties; and ii) a lower hold percentage and volume from its UK operations, further compounded by unfavourable foreign exchange.

Genting Malaysia’s local operations continued to chug along, with 2Q revenue growth of 2.6% y-o-y to RM1.4 billion, while adjusted earnings before interest, taxes, depreciation and amortisation (Ebitda) fell 8% y-o-y to RM434.3 million. This was mostly attributed to increased operating expenses relating to its premium players’ business and escalated costs from the new facilities under the Genting Integrated Tourism Plan.

Its 2QFY17 visitor arrivals ticked up 8% y-o-y to 5.4 million visitors, bringing 1HFY17 visitor arrivals to 10.3 million (5% y-o-y). All in, 1HFY17 average room rates fell 5% y-o-y to RM91 and most of it was occupied by its loyalty card members at 74%.

Genting Malaysia also experienced an increase in foreign hotel guest arrivals, especially from Indonesia, Singapore and Thailand, but this was mitigated by a 23% y-o-y drop in Chinese hotel guests. We gather from management that this was deliberate, as Genting Malaysia assigned more rooms to its members following the opening of the new Sky Casino as part of its business strategy.

Genting Malaysia’s UK business registered a 2Q revenue decrease of 18.4% y-o-y to RM411.2 million on the back of a weaker British pound to the ringgit, and a lower hold percentage and volumes in its premium markets.

As a result, 2Q adjusted Ebitda declined 61.5% y-o-y to RM35.7 million. As for its US operations, Genting Malaysia saw higher sales (9.5% y-o-y) and adjusted Ebitda (79.2% y-o-y) due to increased turnover from Resorts World New York, and significantly narrowed losses from Bimini of US$9.4 million (RM40.14 million) compared to 2QFY16 loss of US$13 million.

Following the softer-than-expected results, we lower our FY17 to FY19 earnings per share (EPS) forecasts by 1.6% to 4.6% to reflect: i) higher operating costs for its Malaysia operations, and; ii) lower profits from Genting UK.

Our TP, based on the revised net asset value, is lowered to RM5.96 after our earnings adjustment. We maintain our “hold” call.

We think the current share price fairly reflects the group’s near-term earnings prospects from its Genting Integrated Tourism Plan properties. — CIMB Research, Aug 25