This article first appeared in The Edge Financial Daily on October 18, 2019

Genting Malaysia Bhd
(Oct 17, RM3.06)
Maintain buy with an unchanged target price (TP) of RM3.90: Post Budget 2020 announcement, we believe sentiment on Genting Malaysia Bhd (GenM) should recover, especially as concerns about potential gaming tax hikes have now been lifted. Empire Resorts expects to be earnings before interest, taxes, depreciation and amortisation (Ebitda)-positive by financial year 2020 (FY20), ahead of the street/our estimates. We have not imputed further earnings growth potential from legalisation of online sports betting. Attention instead should be given to Resorts World Genting (RWG), in anticipation of Visit Malaysia Year 2020 (VMY2020) and the opening of its outdoor theme park, possibly by the third quarter of 2020 if not earlier.

While we did not foresee any gaming tax hike in the first place, the street’s concerns had been present since the unexpected steep gaming tax hike in Budget 2019.

The management of Empire Resorts published its financial projections recently. The optimism is mainly driven by strong revenue growth assumptions (22% and 15% growth for FY19 and FY20 respectively) given the ramp-up in its gaming business.

The published projections topped our existing forecast of a break-even by FY21. While we recognise that gaming volume and the business are expected to grow strongly given the ramp-up in its new facility, synergistic value creation and potential legalisation of online sports betting, we remain conservative, maintaining our lower net revenue growth rate assumption (with a three-year compound annual growth rate [CAGR] of 6.5%), versus its forecast of 8.2% to 9.9%, premised on the fact that the casino market in New York, the US is competitive and growth in the state’s net wins from video gaming has slowed in recent years at a five-year CAGR of just 1.7%.

While the acquisition of Empire Resorts has raised some environmental, social and governance (ESG) concerns, investors should look beyond this related party transaction, which is ultimately a non-core joint-venture asset. Instead, the focus should be on its core business of RWG which contributes about 80% of group Ebitda. RWG has repeatedly shown its capability to cushion gaming tax hike impact and beat street estimates over the past two quarters. Moving forward, its strategy to focus on the premium mass market over high rollers will continue to mitigate the tax hike impact. VMY2020 and the opening of its outdoor theme park should be earnings growth drivers ahead.

We make no change to our earnings estimates. With the Budget 2020 overhang now lifted, we expect market interest to recover given its trough valuations. GenM is trading at 6.9 times enterprise value/Ebitda (-2 standard deviation) with an about 5% dividend yield. Our TP offers a 27% upside even after applying a 10% sum-of-the-parts discount to the ESG derating. Key risks to our call include fluctuations in the luck factor, a drop in gaming volume and regulatory risks. — RHB Research Institute, Oct 17