Genting Malaysia loses RM3.15b market cap on earnings erosion risks

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KUALA LUMPUR (Aug 7): Genting Malaysia Bhd (GenM) saw as much as RM3.15 billion in market capitalisation wiped off as its share price tumbled as low as 14.68% or 53 sen to RM3.08 at the early morning trade, after the firm acquired 46% of the common stock in Nasdaq-listed gaming and entertainment company Empire Resorts Inc from Tan Sri Lim Kok Thay, via Kien Huat Realty III Ltd.

At 11am, GenM's share price pared some of its losses to trade at RM3.22, which is 39 sen or 10.8% lower than yesterday's closing price of RM3.61, making it the top loser across Bursa Malaysia this morning. The share price also valued it at a market capitalisation of some RM21.44 billion.

GenM's trading volume also surged to some 176.86 million shares, making it the most actively traded counter this morning.

GenM, in a stock exchange filing yesterday, said it has inked a binding term sheet with Kien Huat for its wholly-owned Genting (USA) Ltd to undertake the acquisition, which GenM said will be funded by internal funds.

Empire owns and operates Resorts World Catskills (RWC), a casino resort situated on a 1,700-acre site in New York.

As at March 31, 2019, GenM's cash and cash equivalents stood at RM7.92 billion, while its debts stood at RM9.68 billion.

Meanwhile, Hong Leong Investment Bank (HLIB) today downgraded GenM to hold (from buy previously), with a lower target price of RM3.79 (from RM4.21 previously), to reflect the risk of short-term earnings erosion in relation to the acquisition of loss-making New York-based firm from Lim.

HLIB said it views the acquisition as negative and the acquisition price implies a premium to book value despite Empire Resorts Inc still recording losses.

HLIB noted that Empire Resorts had registered losses of US$25 million to US$46 million in the preceding three years.

"FY18, Empire recorded a loss of US$138 million which was largely attributed to the high start-up expenses incurred for the commencement of Resorts World Catskills (RWC) (1Q19 net loss widened by 43% year-on-year to US$37.6million).

"Assuming Empire's FY20 registers a loss similar to that of FY18, we note that the impact to GenM's bottomline will be approximately -RM283 million (circa 23% of our FY20 earnings forecast)," the research house added.

However, HLIB has maintained its forecast for GenM pending more clarity on Empire Resorts' earnings outlook, which at the moment is currently loss-making.

See also: Kok Thay sells loss-making Empire Resorts stake to Genting Msia