GenM may be worth a bet as share price tumbles

This article first appeared in The Edge Malaysia Weekly, on February 10, 2020 - February 16, 2020.
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INVESTORS who missed out on getting hold of Genting Malaysia Bhd (GenM) shares at an attractive price not too long ago now have another chance to do so. The casino operator’s shares had plunged last August following its announcement of a related-party transaction (RPT) to purchase a 46% stake in loss-making, Nasdaq-listed Empire Resorts Inc.

Selling pressure amid the Wuhan virus outbreak is viewed as a buying opportunity, especially for investors with a longer-term investment horizon.

A little reprieve was seen last Friday as GenM rebounded to close at RM3.03. The counter had fallen below the RM3 level to close at RM2.94 on Wednesday — its lowest since January 2019.

The stock has slipped 9.82% over the past three weeks, wiping out some RM1.87 billion from the company’s market capitalisation, which has dropped to RM17.13 billion. But this decline is less than the 16% plunge over a three-week period after the RPT announcement.

Likewise, its 49.45% parent company, Genting Bhd, slid 12.62% to close at RM5.40 last Friday, giving it a market capitalisation of RM20.79 billion.

Meanwhile, GenM’s sister company, Genting Singapore Ltd, also declined, but not as sharply, dipping 8.51% to close at 86 Singapore cents last Friday. In contrast, Hong Kong-listed casino operator MGM China Holdings Ltd plunged 23.17% to close at HK$11.34. In terms of market value lost, another Hong Kong-listed Galaxy Entertainment Group has seen HK$32.5 billion evaporate in three weeks.

It is no surprise that casino operators in Hong Kong have been hit even harder as casinos in Macau were forced to shut down for two weeks as a preventive measure against the coronavirus outbreak.

UOB Kay Hian Malaysia research head Vincent Khoo tells The Edge that GenM, at the current level, is a “good opportunity” for investors to accumulate, with the view that the “Wuhan virus outbreak can be contained by the second quarter of 2020”.

He deems GenM as “compelling” as the counter is now trading close to the research firm’s trough valuation of RM2.80, offering a prospective yield of more than 6%.

“Other catalysts include improving Ebitda by associate US-based Empire Resorts and the opening of the outdoor theme park by the third quarter of this year,” he adds.

Phillip Capital Management Sdn Bhd chief investment officer Ang Kok Heng says investors with a longer investment horizon should buy GenM as the impact of the Wuhan virus is only temporary “unless people are not going to gamble again after the outbreak of the virus”.

“The virus is affecting patronage now but it is temporary. Profits are expected to be affected in the next two quarters,” he explains. He adds that any delay in the opening of the Outdoor Theme Park in Genting Highlands is another factor that could pose a negative impact on GenM’s shares.

Meanwhile, Nomura head of equity research Tushar Mohata sees a bargain-hunting opportunity after the recent drop, considering that GenM’s exposure to overseas tourists is lower than that of its peers, such as those in Singapore.

“Usually, a selloff in tourism stocks during times of pandemics is transitory if history is any guide, and typically makes a V-shaped recovery once the outbreak is contained,” Tushar says.

“While we don’t claim to know when that will be during the current outbreak as data is very limited, given Genting Malaysia’s scheduled theme park opening by this year and potential for earnings upgrades if the losses in Empire [Resorts Inc] are reduced faster than expected, I think it is at a good entry point.”

Tushar has a “buy” call on the stock with among the highest target prices of RM4.10.

However, TA Securities analyst Tan Kam Meng believes otherwise. He advises investors not to buy stocks of businesses which could be affected by the virus outbreak, unless they “are very sure the risk of this virus outbreak has subsided”.

A quick check on Bloomberg data shows that none of the 20 research houses covering the stock have made revisions to their calls so far. There are currently seven “buy”, nine “hold” and four “sell” calls on GenM. With a consensus target price of RM3.56, this implies headroom of 17.5%.

It is worth taking a look back to the Severe Acute Respiratory Syndrome (SARS) outbreak in 2002 to 2003. At the time, GenM fell 30% from its peak at RM1.40 to 99 sen, but by October 2013, it had rebounded 60.52% to RM1.59.

The SARS episode saw a sharp drop in tourist arrivals at the highland casino, resulting in lower earnings and a downward trend in its share price.

For the financial year ended Dec 31, 2003 (FY2003), GenM’s net profit fell 20.76% to RM509.8 million, from RM643.35 million the year before, while revenue slipped 2.63% to RM2.71 billion from RM2.78 billion. The casino operator attributed the lower earnings from the leisure and hospitality segment to the adverse effects of the SARS outbreak in the region, especially during the second quarter of 2003.

For 2QFY2003 GenM’s net profit plunged 65.97% to RM71.97 million, from RM211.49 million a year ago, while revenue was down 10.15% to RM614.19 million, compared with RM683.57 million.

The same could be expected this time as overall travel volume has been slowing since the virus outbreak.

The group has announced that all tour bookings from China for February have been cancelled, which means less revenue from Chinese visitors. The casino operator said the cancellation was carried out in accordance with international health and safety practices to reduce the risk of spreading the novel virus.

It is understood that visitors from China made up about one million of the 29 million visitors to the country last year.

Nonetheless, valuation-wise, GenM is currently trading at a price-to-earnings ratio (PER) of 9.43 times, which appears to be attractive, compared with the average PER of 12.48 times back in 2003.

On top of that, a dividend yield of more than 6% should entice investors in contrast to yields of below 2% in 2016. But, of course, this depends on whether a similar payout is maintained this year.

Given the similarity in the two virus outbreaks, could history repeat itself? If it is any guide, the drop presents a buying opportunity for long-term investors looking to invest in GenM.



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