Genting Malaysia Bhd
(Nov 24, RM4.19)
Maintain neutral with a target price (TP) of RM4.21: Genting Malaysia’s revenue for the first nine months of financial year 2014 ending December (9MFY14) shed 0.6% year-on-year (y-o-y) to RM6.17 billion, dragged down by lower VIP win rates at its Malaysia operations. Earnings before interest, taxes depreciation and amortisation (Ebitda) slid 10.2% y-o-y to RM1.64 billion with overall margin at 26.6% (against 29.5% in 9MFY13), eroded by higher payroll costs at its New York casino, while its Bimini casino registered an Ebitda loss of RM116.1 million. All in, 9MFY14 core earnings of RM950.5 million (-26.6% y-o-y, partly due to a below-average effective tax rate in 9MFY13) fell short of expectations, making up 66.9% of our and 67.6% of consensus full-year forecasts.

Ebitda margin at its Malaysian operation for 9MFY14 would have been 37.0% vis-à-vis 34.6% currently, had its VIP luck factor held up in the third quarter (3Q) of FY14. We estimate that this would translate into 9MFY14 core earnings of RM1.02 billion to RM1.13 billion. Visitor arrivals in 3Q continued the downtrend, dropping 3% y-o-y as foreign tourist visitation slipped 14% y-o-y. Its proposed RM5 billion Genting Integrated Tourism Plan remains largely on track. Of note, 500 new rooms will be available by end-2014 with another 800 to come online by mid-2015. Management also noted that renovation of its existing hotel rooms is ongoing.

We cut our FY14 earnings per share (EPS) by 5.6% to factor in its subpar luck factor year-to-date (YTD).

We also reduce our FY15 to FY16 EPS by 7.1% to 9.2% to take into account the implementation of the 6% goods and services tax (GST) come April 2015. Key risks include fluctuations in luck factor, prolonged losses at Resorts World Bimini, and a potential hike in casino taxes.

We tweak our sum-of-parts-based TP downwards to RM4.21 (from RM4.40) following our earnings revision and after adjusting for the current market value of its listed associate in the 17.8%-owned Genting Hong Kong Ltd as well as its latest net cash balance.

Given the limited upside, we maintain our “neutral” call. — RHB Research Institute, Nov 24

This article first appeared in The Edge Financial Daily, on November 25, 2014.