Genting Malaysia Bhd
(Nov 24, RM5.11)
Maintain fully valued call with a lower target price (TP) of RM4.50: We maintain our fully valued recommendation on Genting Malaysia Bhd, with a lower TP of RM4.50.
Although we remain optimistic about the group’s longer-term growth prospects, supported by the progressive launch of the Genting Integrated Tourism Plan (GITP), the stock has run ahead of its fundamentals at present and the high expectations built up by the investment community could lead to near-term earnings disappointments.
Our earnings forecast is below the consensus as we believe it may take longer than expected for the group to optimise the return from its GITP investment. Also, our TP is lower than the consensus as we are relatively conservative in our valuation metrics.
The potential catalyst is the near-term earnings disappointment due to lower-than-expected returns from its GITP investment, which may lead to a cut in consensus earnings.
We cut our financial year 2017 (FY17) to FY18F earnings estimates by 28% to 11% in view of its disappointing third quarter ended Sept 30, 2017 (3QFY17) results.
Stripping out various exceptional items, the group reported core earnings of RM259 million (-45% year-on-year [y-o-y]; -18% quarter-on-quarter), dragged by lower contributions from Malaysia, and a higher effective tax rate of 34% during the quarter due to non-deductible expenses.
This brings cumulative nine-month period ended Sept 30, 2017 core earnings to RM919 million, which only accounted for 60% of our full-year earnings forecast.
Revenue from Malaysia in 3QFY17 dropped 7% y-o-y to RM1,353 million, dragged by a lower hold percentage from the mid- to premium segments of the business, despite higher business volume in both the mass market and mid- to premium segments.
Its adjusted operating profit dropped 32% y-o-y to RM336 million due to lower revenue, higher expenses for new facilities rolled out under the GITP and increased cost related to the premium segment of the business.
The 3QFY17 adjusted operating profit for its UK operations improved 12% y-o-y to RM54 million due to a 36% increase in revenue, supported by strengthening of the British pound relative to the ringgit, partially offset by higher bad debts.
On the other hand, adjusted operating profit for its US operations more than doubled from RM21 million in 3QFY16 to RM60 million, driven by higher business volume for its New York operations, and lower operating losses registered by its Resorts Word Bimini’s operations.
The key risks to our view include stronger-than-expected contributions from its Malaysian operations as the group may take a shorter time to optimise profitability from the GITP. — AllianceDBS Research, Nov 24