This article first appeared in The Edge Financial Daily on November 29, 2018
Genting Malaysia Bhd
(Nov 28, RM3)
Maintain underperform with a lower target price of RM2.70: Genting Malaysia Bhd announced yesterday that it was suing Walt Disney Co (Disney) and Twenty-First Century Fox, seeking damages exceeding US$1 billion (RM4.2 billion) for breach of contract in relation to its planned outdoor theme park in Genting Highlands. Genting Malaysia has entered into a memorandum of agreement (MoA) with Twentieth Century Fox Licensing & Merchandising in 2013 whereby Genting Malaysia was granted a licence to utilise intellectual property rights associated with Fox theatrical motion pictures for its outdoor theme park under the Genting Integrated Tourism Plan (GITP). We believe the legal proceedings will take time to conclude, and in the meantime, the opening of the theme park is likely to be further delayed. This should affect visitor arrivals in Genting Highlands. We have slashed our visitor arrival growth rate from 8%-9% to 3% (based on the 10-year historical average) for financial year 2019 forecast (FY19F) and FY20F, resulting in a cut in our earnings forecasts by 9%-16%. We have also ascribed a lower price-earnings (PER) multiple for the Malaysian gaming operations to our sum-of-parts valuation (from 14 times to nine times), given the uncertainties surrounding its GITP project.
According to news reports (The Star Online and the Los Angeles Times), problems began as Fox engineered years of delays to force a renegotiation of the contract. In the original agreement, Fox would only start receiving annual fees and royalties after the park opened. However, the MoA was subsequently amended in 2014 and 2017, allowing Fox to start receiving annual fees and royalties immediately. Following the acquisition of Fox by Disney, the former was pressured to terminate the MoA as Disney did not want to be associated with gaming companies due to its “family-friendly” branding. Fox subsequently issued a notice of termination to Genting Malaysia and claimed approximately US$46.2 million in accelerated payments. Genting Malaysia believes that Fox has no rights to terminate the agreement and hence is claiming for the cost of investment and punitive damages exceeding US$1 billion. Genting Malaysia is believed to have invested about US$750 million in the theme park.
The opening of the outdoor theme park was expected to draw more visitors to Genting Highlands with our earlier forecasts projecting an 8% and 9% annual visitor arrival growth rate for FY19F and FY20F. We believe the opening of the theme park will be further delayed (initially targeted to open by the first half of 2019). As such, we have slashed our visitor arrival growth rate to 3%, based on a 10-year historical average. As a result, we have revised down our FY19 and FY20 earnings forecasts by 9% and 16%. In the event that Genting Malaysia wins the legal proceedings and receives US$1 billion in compensation, its GITP project could still remain in limbo without a key attraction. In our opinion, seeking an alternative intellectual property licensing would be a challenge. — PublicInvest Research, Nov 28