This article first appeared in The Edge Financial Daily on January 28, 2019

Genting Malaysia Bhd
(Jan 25, RM3.18)
Maintain hold with an unchanged target price (TP) of RM3.25: The company announced last Thursday evening that Genting Malaysia Bhd’s application for tax incentives for the Genting Integrated Tourism Plan (GITP) had been approved by the ministry of finance (MoF) in December 2014, which, among other things, entitled the company to claim income tax exemptions equivalent to 100% of qualifying capital expenditure (capex) incurred for a period of 10 years.

However, in December 2017, the MoF made a decision to amend the 2014 tax incentive approval, where the amendment did not remove the tax incentives previously granted but effectively prolonged the utilisation period of the tax allowances significantly. Genting Malaysia subsequently submitted an appeal to the MoF but the appeal was turned down in September 2018.

Genting Malaysia filed an application to the High Court for a judicial review of the MoF’s decision in December 2017. On Jan 24, 2019, the High Court granted Genting Malaysia’s application for leave to commence a judicial review on the MoF’s decision and a stay of MoF’s decision pending the disposal of the judicial review application before the High Court.

This news that the tax exempt period was extended is a negative surprise to us. As at end-2018, Genting Malaysia had so far invested RM7.5 billion in the GITP project compared with the total budget of RM10.4 billion. Assuming a RM10.4 billion capex for GITP and the 10-year tax exemption, we estimate the company could save around RM250 million taxes annually over the next 10 years.

Genting Malaysia did not say how long the MoF extended the tax incentives for. Assuming the GITP tax exemption is extended to 20 years, annual tax savings will only be RM125 million. The difference in tax savings is around RM125 million annually, equivalent to a decline of around 8% in financial year 2019 (FY19) to FY20 forecast earnings per share (EPS).

This news is negative for the stock and could hurt investor sentiment in the immediate term. However, the impact on Genting Malaysia’s future EPS is not clear as the company has not indicated how long the MoF extended the tax exemption for the GITP.

The past three months has not been good for Genting Malaysia. In early November 2018, Genting Malaysia was hit by a 10 percentage-point hike in casino tax. In end-November 2018, Genting Malaysia sued Walt Disney Co and 21st Century Fox Inc for more than US$1 billion (RM4.2 billion). Genting Malaysia accused both parties of abandoning a contract related to the planned construction of the first Fox-branded theme park. GITP’s 10-year tax exemption could be extended further.

Until further details on GITP’s tax exemption are revealed, we maintain our EPS forecasts and our RM3.25 TP, based on its revised net value asset. The stock remains a “hold”. Upside risks include the opening of the new outdoor theme park (NOTP) this year while downside risks include the NOTP failing to open in 2019. Long-term charts show strong support for the stock at RM2.85 and RM2.20.   — CGSCIMB, Jan 25