This article first appeared in The Edge Financial Daily on March 19, 2020

This article first appeared as 'Genting Malaysia market cap is on a par with its parent'.

KUALA LUMPUR: Genting Bhd, a conglomerate that has three public-listed companies under its belt with businesses in casino, plantations, and oil & gas, is now being valued the same as its 49.5%-owned subsidiary, Genting Malaysia Bhd (GenM).

Genting’s market capitalisation has shrunk to RM11.94 billion based on yesterday’s closing price of RM3.10, compared with GenM’s market capitalisation of RM11.96 billion. Indeed, GenM, which owns casinos in Malaysia, Britain and the US, has won its parent by a nose, RM30 million.

The selldown on Genting has been stronger than on GenM as reflected on the magnitude of the fall on the two stocks.

Genting plunged 48% since the start of the year to close at RM3.10 yesterday, the lowest level since April 2009, from RM5.92 end-2019, some RM11.36 billion market capitalisation has been wiped off. The conglomerate was traded at RM9-level in early 2018.

Meanwhile, GenM has fallen 33% year to date to RM2.12 from RM3.18 as at end-2019.

The big drop on share prices have, however, made the duo’s dividend yield appealing. GenM’s 12-month yield is at 9.43%, while Genting at 7.1% yield, according to Bloomberg.

Between the two stocks, Affin Hwang Capital Research analyst Ng Chi Hoong has a “buy” call on the parent company, Genting, mainly due to its more attractive valuation. According to him, the conglomerate is now trading at two standard deviations below its historical averages.

Ng has a “sell” recommendation on GenM considering the weak consumer sentiment and the temporary shut down of its casinos.

He told The Edge Financial Daily that the risks remain on GenM as one could not rule out the possibility of an extension on the government’s movement restriction order.

In a note yesterday, he described GenM as “the biggest loser” in the gaming sector.

GenM has temporarily halted its casino operations in both the Genting Highlands, Malaysia and in New York for two weeks. With this, Ng has lowered the earnings per share (EPS) forecast for 2020 by 8.4%.

“We certainly don’t discount the fact that the government could follow the Macau SAR decision to implement social distancing in the casino after the order expires,” he said.

Recently, Moody’s Investors Service has placed on review for downgrade the Baa1 issuer rating of Genting Bhd and A3 issuer rating of Genting Singapore Ltd.

“We don’t think Genting and Genting Singapore [Ltd] will face liquidity issues,” Ng commented. He explained that apart from the US casino Resorts World Las Vegas (RWLV) project that is scheduled to be ready next year, Genting is not undertaking any major capital expenditure programme. Furthermore, he noted that the RWLV project has already secured the funding it needed from the US.

“Fundamentally the Genting group remains sound and should be able to meet all of its financial obligations, despite the recent slow-down. However, if Covid-19 were to prolong beyond April, there could be a downside risk to our assumption and forecast,” Ng said.

Indeed, valuations of both the counters have been very attractive and cheap.

Nonetheless, another gaming analyst, who spoke on condition of anonymity, said the “biggest hanging factor” is the potential hike in gaming tax as oil revenue or dividends from Petronas appears to be at risk, given the slump in oil prices.

With the new Perikatan Nasional government that is formed partly by religious political party, the analyst noted that gaming counters or sin counters are easy targets and are seen as a cash cow for higher tax revenue from the government.

“I know it looks cheap now, but to me I’m not convinced to say let’s ‘buy’ for the long term, because when gaming tax goes up, it will not come down.”

“But, if we disregard the risk of higher gaming tax, then the Genting stocks will really look cheap,” said the analyst.

Valuation-wise, GenM is trading at a price-to-earnings (P/E) of 8.59 times, from 12.87 times at end-2019, while Genting is at P/E of 5.98 times, versus 11.42 times end-2019.

According to Bloomberg data, GenM has seven “buy” calls, eight “hold” and five “sell” ratings, with a consensus target price of RM3.23. This would mean a 52% headroom.

Genting, on the other hand, has 13 “buy” calls, three hold and one “sell”, with a consensus target price of RM6.64, implying an upside of 114%.