Genting Malaysia Bhd
(Aug 7, RM3.18)
Maintain buy with an unchanged target price (TP) of RM4.40: We reiterate “buy” with an unchanged sum of parts-derived TP of RM4.40, a 22% upside plus 4.4% financial year 2019 forecast (FY19F) yield. Genting Malaysia Bhd has proposed to acquire a 49% stake in Resorts World Catskills (RWC). We are neutral on the proposal as the estimated acquisition cost of about US$180 million (RM754.2 million) or US$9.74 a share is insignificant at about 3.5% and 4.3% of Genting Malaysia’s market cap and net assets. While the acquisitions are not value-accretive and may negatively impact our earnings forecasts, the acquisition price appears to be fair. Our forecasts are unchanged.
Genting Malaysia has proposed to acquire a 35% stake (13.2 million shares) in the enlarged common shares in Empire Resorts Inc (ER) for US$128.6 million or US$9.74 a share from Kien Huat Realty III (KH) via a related party transaction. Genting Malaysia has also jointly proposed to privatise ER via a 49:51 joint venture (JV) with KH at US$9.74 a share. ER runs RWC’s casino, which houses a 100,000 sq ft gaming floor, 332-suite luxury hotel, nine-hole golf course, 1,600 slot machines and 150 live tables. Both proposals are expected to be completed in the fourth quarter of 2019 (4Q19), subject to relevant approvals and will be internally funded.
We believe the total acquisition price of US$180 million for Genting Malaysia to own 49% of ER via the proposed JV is insignificant at about 3.5% and 4.3% of Genting Malaysia’s market cap and net assets. While the acquisitions are not value-accretive (at 1.9 times price-to-book value [P/BV] versus Genting Malaysia’s current P/BV of 1.2 times) and may negatively affect our earnings forecasts, the acquisition price appears to be fair compared with the potential gross gaming revenue of more than US$200 million and the US$1 billion cost to construct RWC. Undertaking a similar greenfield expansion of such a scale (along with a licence) would likely cost more, based on our estimates.
For 2018 and 1Q19, ER reported respective net losses of US$139 million and US$38 million and losses before interest, taxes, depreciation and amortisation of US$54 million and US$9 million, which are about 4.1% and 2.9% of our FY20F earnings before interest taxes, depreciation and amortisation (Ebitda) and TP for Genting Malaysia. While it usually takes at least two to three years for a new casino to turn Ebitda-positive (RWC only started operations in February 2018), notable improvements were seen in the 2Q19 gaming report numbers for RWC. Better results can also be expected for the coming quarters as ER consolidated its operations after ceasing its Monticello Raceway Casino operations in April 2019. Genting Malaysia will also earn management fees by providing operational and management services to the proposed JV.
We believe acquiring RWC would help to anchor the north-eastern US gaming market alongside Resorts World Casino New York City and avoid cannibalisation. It would also tap into the potential online sports betting market (if legalised) via a collaboration with bet365 as New York’s annual sports betting revenue is expected to hit US$1 billion within the next five years. Currently, only on-site wagers are allowed and RWC is one of four casinos that is licensed.
Our forecasts are unchanged pending further developments and guidance on the deals. Key risks to our call include fluctuation in luck factor, a drop in gaming volume and regulatory risk. — RHB Research Institute, Aug 7