Thursday 28 Mar 2024
By
main news image

This article first appeared in The Edge Malaysia Weekly, on February 29 - March 6, 2016.

WITH the only casino in Malaysia, Genting Malaysia Bhd has always been a unique stock on Bursa Malaysia. For the longest time, it even boasted the only licensed casino in Southeast Asia.

As the house always wins, gaming has been a good business for the group. But investors holding its stock have been deprived over the years as Genting Malaysia turned into a cash-rich value trap, preferring share buybacks to bigger dividend payouts.

Last week, Genting Malaysia announced that it would double its capital investment in the Genting Integrated Tourism Plan (GITP) — from RM5 billion to RM10.38 billion.

The announcement does not come as a surprise. In August last year, The Edge reported an increase in GITP’s cost beyond RM5 billion after Genting raised RM2.4 billion in debt. The quantum of the increase, however, caught many by surprise and the share price fell 3.7%. This gave Genting Malaysia a market capitalisation of RM23.9 billion.

Says a fund manager, “The news came as a shock. This is a project that was in planning for two to three years and it is already underway. Out of the blue, the company wants to double its capex? It is not a small amount either. Naturally, the market sees this as a negative event for the company.”

The capex plan will turn the once cash-rich company into a debt-laden one — something that may not be acceptable to many, considering its investments have not paid handsome returns. In FY2015, the company slipped into a net debt position for the first time in nearly 10 years (see chart).

So far, Genting Malaysia has not mentioned the cost overruns in its higher investments.

According to its announcement, the higher capex will see the Twentieth Century Fox World theme park enjoy a “substantial increase in investment with more spectacular, thrilling and state-of-the-art rides than previously announced. Total investment in the Twentieth Century Fox World theme park is expected to exceed RM2 billion.”

Note that the original cost of the theme park was RM1 billion and the increase comprises only a small portion of the jump in the group’s capex for Phase 1, which has grown from RM4 billion to RM8.11 billion.

Most of the amenities mentioned in last week’s press statement are not new. Other than the theme park, the group’s original RM5 billion budget would have included new hotels, the Sky Avenue shopping district, a 10,000 pax showroom, a new cable car system and a new multi-storey car park.

“While management has disclosed lots of details of GITP, most of it has already been presented before. However, management guides that a portion of the higher cost will be due to infrastructure works, including accommodation for 7,000 employees,” says an analyst.

“What management has revealed does not really justify the massive increase in cost. However, they have been secretive about the breakdown of cost, which leaves everybody guessing. It is tough to estimate how much is due to cost overruns,” he adds.

For the short to middle term, the increased capex and correspondingly higher depreciation are expected to drag down Genting Malaysia’s earnings by as much as 11%.

Some analysts are saying Genting Highlands’ casino will have to hold all the aces in its table games more often for the group to recover the massive investment.

Realistically, the branded theme park is a nice asset to own but at the end of the day, the group’s real money-maker is the casino. With its cost now in excess of RM10 billion, the return on investment for GITP will be a really big concern for investors.

Its sister company across the Causeway could be an example of it.

Over in Singapore, Genting Singapore plc has invested S$6.6 billion in integrated resort development Resorts World Sentosa (RWS). Its theme park, Universal Studios Singapore, is the only one in Asean.

Last year, Universal Studios Singapore received a record number of visitors — 1.2 million. Nonetheless, its net profit shrank to S$193.06 million in its financial year ended Dec 31, 2015, from S$635.2 million the year before. Genting Singapore blamed the earnings contraction to fewer high-rollers patronising the casino.

Genting Singapore’s real money is the casino, which generates about 75% of its revenue. The non-gaming segment only generates about one quarter of revenue.

Will Genting Malaysia’s GITP have better luck?

It remains to be seen if Genting Malaysia’s bet on GITP pays off. While it is likely to contribute positively to the group’s earnings, GITP is unlikely to match the kind of returns that the gaming business has been generating, especially with the recent increase in capex to RM10 billion, say some analysts, not to mention the gestation period.

To be fair, it is not easy to identify a new investment that can generate the kind of returns that Genting Malaysia’s casino achieved in the past four decades. With lucrative investments hard to come by, perhaps management should distribute the excess cash to shareholders rather than invest it in low-yield ventures.

Simply put, Genting Malaysia’s shareholders now have to contend with a completely different animal — a debt-laden company with a costly investment, whose profitability is unproven.

genting-malaysia_chart_mm22_TEM1099_theedgemarkets

Save by subscribing to us for your print and/or digital copy.

P/S: The Edge is also available on Apple's AppStore and Androids' Google Play.

      Print
      Text Size
      Share