This article first appeared in The Edge Financial Daily on April 5, 2019

Genting Malaysia Bhd
(April 4, RM3.25)
Upgrade to buy with a target price (TP) of RM3.66: We are neutral on the purchase of superyacht Equanimity as we see it as a normal acquisition of an asset to support Genting Malaysia’s existing operations in leisure, hospitality and entertainment. Specifically, the group can use the yacht to ferry very important patrons to its casinos in Malaysia, the US and the UK. It could also lease the superyacht to its sister companies operating in Singapore and the Philippines.

The Equanimity’s purchase price of US$126 million was about half the original price of US$250 million (about RM1 billion) and below the reserve price of US$130 million appraised by an independent UK-based appraiser. In terms of balance sheet impact, considering Genting Malaysia’s cash hoard of RM8.1 billion, net gearing of 0.1 times and total assets of RM31.7 billion as of December 2018, the purchase is insignificant to the group’s accounts. Assuming the purchase is to be financed via 10% internally-generated funds and 90% borrowings, the net gearing will rise to 0.12 times.

We adjust our financial years 2019, 2020 and 2021 (FY19/20/21) earnings estimates by -3.5/-2.5/-2.4% after incorporating FY18 audited accounts in our forecast. However, we maintain our capital expenditure assumption of RM1 billion for FY19.

With the slight earnings downgrade, we cut Genting Malaysia’s discounted cash flow valuation to RM3.66 per share (from RM3.70 previously). We upgrade our recommendation to “buy” (from “hold” previously) as the recent weakness in share price represents a good entry opportunity. — TA Securities, April 4