This article first appeared in The Edge Financial Daily on February 15, 2018
Only World Group Holdings Bhd
(Feb 14, RM1.32)
Maintain hold with a lower target price (TP) of RM1.35: Only World Group Holdings Bhd’s (OWG) first half of financial year 2018 (1HFY18) net profit growth of 17.2% year-on-year (y-o-y) is below expectations. 1HFY18 revenue rose 1% y-o-y, on higher contribution from its amusement and recreation segment, which offset lower revenue from food service operations affected by closure of several food services outlets in Genting Highlands. Despite higher interest costs (>100% y-o-y) and depreciation charges (75.6% y-o-y), 1HFY18 net profit improved 17.2% y-o-y to RM4.7 million, mainly due to a sharp decline in tax rates to 20.7% (-24.9 percentage points y-o-y).
Second quarter of financial year 2018 (2QFY18) net profit improved 17.6% quarter-on-quarter (q-o-q). For 2QFY18, OWG recorded a revenue of RM32.1 million (+6.5% q-o-q) and RM2.6 million in net profit (+17.6% q-o-q). The stronger q-o-q performance was mainly due to: i) a higher number of visitors to Komtar and Genting in tandem with the school holiday period; ii) various promotional activities during the quarter; iii) better cost control; and iv) lower depreciation charges (-14.8% q-o-q). On a y-o-y basis, 2QFY18 net profit declined 5.7% due to higher depreciation and interest expenses incurred.
Stronger earnings ahead are expected, driven by Genting Integrated Tourism Plan (GITP) impact. As part of the GITP, OWG commenced operations of a new family attraction and three food and beverage outlets towards end-2017. OWG aims to open three more family attractions before the Chinese New Year holiday period to leverage on the holiday crowd. We view this positively as we expect earnings to grow sequentially in tandem with higher contribution from its Genting operations. OWG also plans to bid for more floor space in Genting, but this is subject to availability and the allocation given.
As 1HFY18 net profit was below expectations, we cut our FY18 to FY19 earnings per share (EPS) by 21.4% from 50.3%. This is to account for lower average spend per visitor to Komtar to RM40 from RM75 previously, a delay in the opening of the new outdoor theme park in Genting to end-2018, and higher overall operating expenses. We also introduce our FY20 estimates.
In tandem with our EPS cut, our TP is lowered to RM1.35, still based on 18 times price-earnings ratio (PER) (20% discount to our consumer-sector calendar year 2019 PER of 22.7 times). We maintain our “hold” call on OWG. We expect the group to record strong earnings ahead, but we believe its earnings growth has been largely priced into its current valuations. Downside/upside risks: lower-than-expected visitors to Komtar and Genting/higher contribution from Genting and Komtar operations. — CGS-CIMB Research, Feb 13